It looks as if the US alone is having second thoughts. Pulling out of Iran nuclear deal: now what? Perilous conjecture the MENA countries find themselves in. Donald Trump who is determined to “dismantle” the Iranian nuclear agreement announced last night that the United States withdrew from the agreement. The American withdrawal would most probably be accompanied by the restoration of the sanctions. The question then arises as to whether France, the United Kingdom and Germany persist in pleading for compliance with the 2015 agreement which they considered “historic” in the sense that it is a step forward in the Non-proliferation Nuclear power, will bow to America’s unilateral decision. Will there be any other repercussions such as those impacting the price of certain commodities?
Thanks to Donald Trump, the hard-won deal that set up a process to end Iran’s nuclear weapons programme is on its deathbed. After weeks of entreaties and visits from his counterparts in the other states that signed the accord, Trump has announced that the US will be withdrawing from it and reimposing the sanctions the deal lifted. That makes it hard to see how the deal will survive.
Given Trump has spent years referring to this as “the worst deal ever”, perhaps his decision to back out is less than surprising – but that doesn’t mean it isn’t shocking.
To be sure, there are real problems with the deal. Struck in 2015 between Iran and the P5+1 powers – the US, the UK, Russia, China, France, and Germany – it fails to address longer-term concerns about the nuclear programme (the Iranian government is renowned for playing a long game) and does not limit the country’s ballistic missile capability. Perhaps the biggest criticism, though, concerns Iran’s behaviour in the Middle East, which has not been curtailed.
As the British foreign secretary, Boris Johnson, recently said on Fox & Friends, a right-wing talk show Trump is known to watch: “Look, Iran is behaving badly, has a tendency to develop intercontinental ballistic missiles. We’ve got to stop that. We’ve got to push back on what Iran is doing in the region. We’ve got to be tougher.” But Johnson also urged the US not to “throw the baby out with the bathwater”.
It seems that plea, and those of other world leaders, fell on deaf ears. So what does it all mean? First, Trump’s decision to effectively scrap deal plays into the hands of Saudi Arabia and Israel. It will also inflame already livid tensions across the Middle East, pouring fuel onto the fires of conflict from Syria to Iraq, Lebanon, Yemen, and beyond.
Taking sides
In recent years, belligerents in the Middle East’s various conflicts have generally fallen into two separate camps. On the one hand is a pro-Iranian camp that is comprised of the Syrian government, the Iraqi government, Hezbollah and a range of non-state actors; on the other is an anti-Iranian camp, comprised primarily of Saudi Arabia, Israel, Egypt, Bahrain and the UAE. Both camps are seizing opportunities to recalibrate the regional order, and as they try to set and push boundaries in their favour, they raise the chances of error, miscalculation and catastrophe.
But while Iranian-Saudi rivalry has played a central role in shaping the nature of the contemporary Middle East, so have Iran’s rivalries with two other powers: Israel – with whom Saudi Arabia is seeking a rapprochement of sorts – and the US.
Happier times: the officials who struck the deal celebrate in 2015. EPA/Herbert Neubauer
Debate about the nuclear deal is as much about these different camps as it is about the deal itself. Washington, Riyadh and Jerusalem have long been concerned about the development of an Iranian nuclear weapon, yet the more short-term concern is about Tehran’s behaviour across Syria, Bahrain, Iraq and Lebanon, where it capitalises on schisms within and across state borders. Iran has long demonstrated an excellent ability to exploit and manipulate such divisions. To see that ability in action, one only has to look at events in Iraq, Lebanon and Syria – leaving aside allegations of nefarious involvement in Bahrain, where it’s accused of backing anti-government groups, and Yemen, where Saudi Arabia is waging a massive military campaign against forces it claims are Iranian proxies.
Few want to see Iran further indulge what one US official called its “propensity for mischief”, and escalating tensions across already deeply divided societies risk adding to the already catastrophic loss of human life. So long as Iran feels emboldened or mandated to act up, the nightmarish conflicts in Syria and Yemen will be even more difficult to resolve.
But perhaps the biggest concern in all this is the Israeli response.
Keeping the lid on
Iran has sought to ameliorate its strategic concerns by pushing forward geopolitically, away from its sovereign borders. Getting influence over territory is a key strategic goal. But in doing this, Iran is directly inserting itself into Israeli security calculations.
Ever since the revolution of 1979, Israel has long viewed the Islamic Republic of Iran with great trepidation. As concerns about Iranian nuclear aspirations increased, so too did the rhetoric from Israeli leaders condemning Tehran’s actions. No one who has heard it will forget the March 2012 speech where Benjamin Netanyahu said: “If it walks like a duck, if it talks like a duck, then what is it? That’s right, it’s a duck. But this is a nuclear duck.” More recently, Israel produced a dossier that sought to demonstrate that Iran had lied during the negotiations that produced the deal.
In addition, Israel has a precedent of striking against what it perceives to be a serious threat to its survival. Take the strike on Iraq’s Osirak reactor in 1981, or the strike against a suspected Syrian nuclear facility in 2007. If the deal collapses and Iran restarts its nuclear programme, then similar unannounced attacks on suspected nuclear sites are a strong possibility.
So where do things stand as of now? If the deal breaks down in full, tensions across the Middle East could escalate to a dangerous level, as players on all sides rush to recalibrate their positions. The various fronts in Syria will only become more deadly as Iran doubles down to preserve its influence over territory there – a corridor of control that has been called a “land bridge to the Mediterranean”, and by extension, to Israel.
Ultimately, Trump has missed the point of his counterparts’ pleas to keep the deal in place. This isn’t about whether or not Iran has leeway to build a nuclear weapon; it’s about keeping tensions across the Middle East in check, and preventing a catastrophic new war. Diplomats the world over are in for some sleepless nights.
Trading of Brent oil as at October 28, 2017 closed at its highest level at $60.62 and at $54.17 for the WIT and for natural gas at $2.75 MMBtu, down 5.72%. Euphoria apart, this contribution would attempt to review the The Vienna agreement and the Oil & Gas 2017 – 2030 prospects. Indeed, the listing of $55 to over $60 a barrel, could be explained by the approaching winter, tensions in Iraq, decline of the Dollar from $1.20 a Euro to $1.16 and most importantly a timid revival in the global economy. Reassuring statements of respect for the Vienna agreement as envisaged by Russia and Saudi Arabia together with the proposed sale of 5% of the oil giant Aramco did concur to the above as well. But before we dwell into the Vienna agreement and the Oil & Gas prospects up to 2030, let us have look at the following first.
The determinants of oil prices
Eight key factors are determinant in oil prices.
First, central to the determination of oil prices is the growth of the world economy and especially that of China’s and its energy structure for 2020/2030. Added to that would be the other geostrategic factors such as the impact of tensions in Iraq, (the Kurdish zone producing 500,000 barrels / day) and statements of US President mulling to review the Iran agreement and the still on-going tensions in Nigeria and Libya.
On the supply side, more rapid increase than expected of oil production, though unconventional mainly from the US Shale sector that upset the entire world energy map.
Rivalries within OPEC with some not respecting their quota; the rivalry between Iran and Saudi Arabia; this latter being the only producer in today’s world that could affect global supply and hence bear on prices, depending on an agreement between the US, (the latter is not affected by the OPEC / non-OPEC accord) and Saudi Arabia to determine the floor price.
The Russian expansionist strategy whose giant Gazprom (45,000 billion cubic meters known gas reserves) through the North Stream and South Stream (the latter currently frozen) from a planned capacity of over 125 billion cubic meters gas to supply Europe, not including new pipelines to Asia. Russia needs funding, tensions in Ukraine have not affected its exports to Europe, where its market share was 30% in 2013/2016. All this contributes to a measured support from Russia at a price regulation agreement. Recently, Russia has increased its production and open new fields in Siberia or the Arctic, showing an aggressive strategy.
The return on the market of Libya with an easy 2 million barrels / day, Iraq with 3.7 million barrels a day (with production costs of less than 20% if compared to competitors) totalling up to over 6/7 million barrel / day. Iran with reserves of 160 billion barrels allowing it to export between 5/6 million barrels a day on top of its having gas reserves with more than 34,000 billion cubic meters gas.
The new discoveries in the world including offshore especially in the Eastern Mediterranean (20,000 billion cubic meters of gas partly explains the tensions in this region) and Africa including Mozambique could be the third black gold reservoir of Africa and the new technologies that allow the operation and cost reduction of marginal gas fields and Shale oil.
The US and Europe currently account for over 40% of global GDP with a population of less than one billion. These are pushing for energy efficiency with a planned 30% reduction and an urgent move towards energy transition, to notably reduce global warming because if the Chinese, Indians and Africans had the same pattern of energy consumption as that of the US and Europe, the world would need five planets. The global strategy should be based on limiting the efforts of exploitation and use of fossil fuels, coal, etc. and gradually move towards an energy mix of all renewables.
The evolution of the Dollar and the Euro like for instance any rise of the Dollar, although no linear correlation between the two exists, would lower oil prices and as an immediate reaction to that the US stocks and often forgotten Chinese stocks would start building up.
OPEC and the Vienna agreement
Saudi Arabia’s share is over 33% of OPEC’s output. The Gulf countries alone account for 60% of this production. For countries outside OPEC, the most important traditional producer remains Russia. The corresponding commitment to the effort envisaged in the Algiers meet in September 2016 did somehow help lift oil prices from a range fluctuating between 55/60 dollars a barrel. Following the work of the High-Level Committee, which helped to smooth tensions between Saudi Arabia and Iran, the last meeting in Vienna in December 2016, enabled the member countries of the OPEC and non-OPEC countries to reach an agreement to reduce and for the first time since 2008 by 1.8 million barrels / day for a period of six months with possible extensions each time additional 6 months according to market conditions. Production limits set by the agreement affecting 11 of the 14-member countries of OPEC. The essence of the agreement of November 30 is carried by the largest producer’s cartel: Saudi Arabia, Iraq, United Arab Emirates, Kuwait, with Iran, Nigeria and Libya being temporarily exempted. Nigeria announced in late February 2017 an increase in production of over 300,000 barrels a day between 2017/2018 besides the return of Libya which can export between 1.5 and 2 million barrels a day. But at the last OPEC meeting, Russia producing more than 10 million barrels / day requested that these countries participate in the reduction effort to stabilize the market. We must recall that Iran has benefited from the most favourable reference with a volume of 3.97 million barrels / day (Mb / d) retained (against a level of 3.69 Mb / d, although Iran wants its production back to 4.2 Mb / d. Iran and Iraq might be tempted to exceed their quotas if they have surpluses. Saudi Arabia as the world’s largest oil exporter, has agreed to bring its production to 10.06 Mb / d and thus reduce its production of 500,000 barrels. non-OPEC countries agreed to a reduction of 558,000 b / d in addition to the reduction of 1.2 Mb / d of OPEC countries almost 1.8 Mb / d. For non-OPEC, Russia is the most important of these contributors with a reduction of 300,000 b / d. the other countries to participate in the effort will be Mexico, Kazakhstan, Malaysia, Oman, Azerbaijan, Bahrain, Equatorial Guinea, South Sudan, Sudan and Brunei.
What are the prospects?
According to OPEC the drop in the price of a barrel of oil from $102 to $45 since June 2014 caused a loss of $1,000 billion in revenues and $1,000 billion in terms of investment losses. At a price of $55, the reduction causes a loss of 3780 million barrels / year and about $219 billion for the OPEC countries. A survey of OPEC shows that average profitability for many OPEC countries to balance their budgets, the price that covers costs and a reasonable profit margin should be 60 Dollars. For Algeria profitability of marginal fields is at a price above $60, average deposits between 40/50 Dollars and large deposits between 30-40 Dollars per barrel. But many experts question the temptation for producers to “make up” natural declines, related to the depletion of some deposits and already integrated with forecasts, to pass them for voluntary reductions. OPEC while representing the world’s largest reserves, no longer has the same impact on the market than in the 70, with only 33% of marketed worldwide production, the remaining 67% being made outside OPEC. A barrel at the recovery price of 55/60 Dollars will naturally depend on the growth of the global economy, without prejudging the risk of an increase in supply that would be due to the increased production of non-OPEC countries, the US whose marginal fields becoming profitable. As from their rising prices, the massive influx of American Shale oil production of which costs have fallen for three years by 40 to 50% thanks to new technologies being profitable for large deposits to 30 Dollars, for average deposits by $40 and for marginal fields between 50/60 Dollars. According to Bloomberg as of February 2017, the unconventional oil producers have made huge efforts to reduce their profitability thresholds, earning money with a barrel between about 40/50 Dollars, whereas it required at least 70 to 80 Dollars. There are still two years and $30 in some Texas counties where investments should thus increase by 30% in the sector in 2017. Saudi Arabia, a leader of the cartel, had long supported a policy of low prices, hoping to oust competitors of OPEC, including US Shale oil producers, but the fall in prices had finally affected its economy, prompting it to change strategy. Most US stocks reached a record level, with a growth of a soft global economy, which takes demand to a higher price of up to $60 that could make the American marginal fields profitable, thus allowing them to increase their supply that in turn may then lead to a lower price due to oversupply. Hence the proposal of Saudi Arabia to have an equilibrium price which is around 55/60 Dollars a barrel to balance the interests of producers and consumers and specially to cope with the American competition.
In summary, the supply / demand in the short term, the structuring of the growth of the world economy and the new global energy configuration looming in 2017/2030, with the increasingly competing alternative energy, will in the future be the determinants of the price of oil and natural gas. Whilst avoiding thinking in terms of linear energy model, we should see an energy transition based on energy efficiency and all renewables that should know a boom according to the latest IEA report of October 2017 with cost cuts planned for over 60%.
The very best and obvious example of what this article of McKinsey’s is all about, would be with how the Shale Gas impacted conventional oil, more specifically how the Impact of U.S. Shale Oil Revolution on the Global Oil Market has come to be the latest trend.
The U.S. Shale Oil Revolution ?
Indeed, technology advances have made it possible not only for the extraction however debatable with respect to its effects on the environment but also its production.
“Much has been written about the United States shale oil revolution. Some sources like the International Energy Agency (IEA) went as far as to predict that the United States will overtake Saudi Arabia and Russia to become the world’s biggest oil producer by 2020 and energy self-sufficient by 2030.” This was then in 2012, at the time of this write up of MG Salameh but 5 years on, there seems to be a bis of the same that is on-going.
This interactive graphic explores how recent trends could affect supply and demand for resources.
Technological advances are changing the way resources are consumed and produced. This interactive graphic highlights some of the potential changes to both supply and demand for resources. The scenarios depicted should not be considered as specific forecasts but rather as illustrative of the broad trends.
Over the next two decades, we expect energy demand to be reduced in homes, offices, and factories, as well as in transportation, as engines become more fuel efficient and as self-driving and electric vehicles take off. Renewable sources of energy, including wind and solar power, will make major inroads into electricity generation, competing with fossil fuels. For resource producers, data analytics, robotics, and the Internet of Things will bring considerable productivity improvements. To learn more about the impact of ongoing shifts, read the McKinsey Global Institute research report “How technology is reshaping supply and demand for natural resources.”
By Jonathan Woetzel, Richard Sellschop, Michael Chui, Sree Ramaswamy, Scott Nyquist, Harry Robinson, Occo Roelofsen, Matt Rogers, and Rebecca Ross
The ways we consume energy and produce commodities are changing. This transformation could benefit the global economy, but resource producers will have to adapt to stay competitive.
The world of commodities over the past 15 years has been roiled by a “supercycle” that first sent prices for oil, gas, and metals soaring, only for them to come crashing back down. Now, as resource companies and exporting countries pick up the pieces, they face a new disruptive era. Technological innovation—including the adoption of robotics, artificial intelligence, Internet of Things technology, and data analytics—along with macroeconomic trends and changing consumer behaviour are transforming the way resources are consumed and produced.
On the demand side, consumption of energy is becoming less intense and more efficient as people use less energy to live their lives and as energy-efficient technologies become more integrated in homes, businesses, and transportation. In addition, technological advances are helping to bring down the cost of renewable energies, such as solar and wind energy, handing them a greater role in the global economy’s energy mix, with significant effects for both producers and consumers of fossil fuels. On the supply side, resource producers are increasingly able to deploy a range of technologies in their operations, putting mines and wells that were once inaccessible within reach, raising the efficiency of extraction techniques, shifting to predictive maintenance, and using sophisticated data analysis to identify, extract, and manage resources.
A new McKinsey Global Institute report, Beyond the supercycle: How technology is reshaping resources, focuses on these three trends and finds they have the potential to unlock around $900 billion to $1.6 trillion in savings throughout the global economy in 2035 (exhibit), an amount equivalent to the current GDP of Canada or Indonesia. At least two-thirds of this total value is derived from reduced demand for energy as a result of greater energy productivity, while the remaining one-third comes from productivity savings captured by resource producers. Demand for a range of commodities, particularly oil, could peak in the next two decades, and prices may diverge widely. How large this opportunity ends up being depends not only on the rate of technological adoption but also on the way resource producers and policy makers adapt to their new environment.
About the author(s)
Jonathan Woetzel is a director of the McKinsey Global Institute, and Michael Chui is an MGI partner; Richard Sellschop is a partner in McKinsey’s Stamford office; Sree Ramaswamy is a partner in the Washington, DC, office; Scott Nyquist is a senior partner in the Houston office; Harry Robinson is a senior partner in the Southern California office; Occo Roelofsen is a senior partner in the Amsterdam office; Matt Rogers is a senior partner in the San Francisco office; and Rebecca Ross is an associate partner in the London office.
Policy makers could capture the productivity benefits of this resource revolution by embracing technological change and allowing a nation’s energy mix to shift freely, even as they address the disruptive effects of the transition on employment and demand. Resource exporters whose finances rely on resource endowments will need to find alternative sources of revenue. Importers could stock up strategic reserves of commodities while prices are low, to safeguard against supply or price disruptions, and invest in infrastructure and education.
For resource companies, particularly incumbents, navigating a future with more uncertainty and fewer sources of growth will require a focus on agility. Harnessing technology will be essential for unlocking productivity gains but not sufficient. Companies that focus on the fundamentals—increasing throughput and driving down capital costs, spending, and labor costs—and that look for opportunities in technology-driven areas may have an advantage. In the new commodity landscape, incumbents and attackers will race to develop viable business models, and not everyone will win.
Electric and / or Self-Driving cars vs Conventional ones?
The oil and gas giant British Petroleum (BP) predicted in a report that was published last week that although electric cars are increasingly being put on the roads and renewable energy growing at exceptional rates, fossil oil extraction, production, etc. which needless to remind is BP’s main business line, would not only remain in demand but see this latter rise to unprecedented levels. The reason for this unabated level in demand would be according to this report the greater numbers of the Third World countries (cum Emerging) populations reaching levels of prosperity allowing car ownership. The question beside that of the validity of fossil oil demand predicted not to decrease in the future, is which direction the automotive manufacturing industry would take in the future. Would it be Electric and / or Self-Driving cars and in which part of the World would these be on the roads? And most importantly, which type of energy would be used in which type of vehicle ?
We republish the following Brookings article on driveless cars as these obviously will be marketed mainly in the so-called First World.
“Driverless cars are a transformative technology that could have important implications for society, national security, the economy, and the environment,” Darrell West and Hillary Schaub wrote in a 2015 piece that outlined a number of challenges, benefits, and policy recommendations related to autonomous vehicles. West, vice president and director of Governance Studies, and Schaub, a program coordinator, addressed specific issues for the continued development of this technology, including: cybersecurity and liability, increasing fuel efficiency and reducing traffic fatalities, and addressing international safety and testability. “The discussion surrounding driverless cars involves a great deal of uncertainty,” West and Schaub observed. “There are huge ethical decisions that must be made regarding these new technologies. It is the responsibility of policymakers to help decide these issues.”
Here are analyses and data about driverless cars drawn from recent Brookings research.
Computers can be considered legal drivers of vehicles
Noting that in early 2016, the National Highway Transportation Safety Administration determined that under federal law computers could be considered legal drivers of vehicles, Darrell West and Jack Karsten of the Center for Technology Innovation write that, “With the combined efforts of the technology industry, automakers, and federal regulators, driverless cars could achieve widespread use sooner than many drivers and policymakers might expect.”
With technology companies and automakers continuing to make advances on driverless cars, and with increased federal research, companies like Toyota are saying they aim to deliver driverless vehicles around 2020. Given this pace of development, West and Karsten argue that “creating a national strategy for driverless cars is a crucial task for federal transportation officials.”
Pittsburgh is a leader in driverless car technology research and testing
Bruce Katz, the Brookings centennial scholar, writes of Pittsburgh, Pennsylvania Mayor Bill Peduto being the first person to hail and ride a driverless taxi. The former steel manufacturing center has become, Katz notes, “the research lab and test bed for this revolutionary technology” due to an “ecosystem” that includes the robotics research unit at Carnegie Mellon University, plus start-ups and large firms, and Uber’s Advanced Technology Center. “But what has made Pittsburgh especially effective,” Katz says, “is public, private and civic leadership that is willing and eager to make the city itself a laboratory for technological invention and testing.”
The U.S. military has an interest in self-driving vehicles
Autonomous vehicles are expected to comprise 25 percent of the global market between 2035 and 2040
In a wide-ranging 2016 paper, Darrell West explores the different types of autonomous vehicles, their impact, and cross-national issues involved with their development. He looks in detail at the technology, budgetary, regulatory, legal, and policy frameworks for autonomous vehicles in China, Europe, Japan, Korea, and the United States. “In each nation,” West argues, “government officials and business leaders have to resolve these matters because within a foreseeable period, the technology will have advanced to the point where intelligent vehicles will spread into key niches such as ride-sharing, taxis, delivery truck, industrial applications, and transport for senior citizens and the disabled.”
“People and businesses will have driverless options for taking them safely to their destinations,” he says, “and it is important for leaders to provide reasonable guidance on how to commercialize advanced technologies in transportation.”
Fragmented regulatory framework the biggest challenge to driverless cars in America
In a briefing paper included in the Election 2016 and America’s Future series, and now part of the “Brookings Big Ideas for America” book meant to inform the new Trump administration, West explains that the “biggest American challenge” for autonomous vehicles “is overcoming the fragmentation of 50 state governments and having uniform guidelines across geographic boundaries. Public officials should address questions such as who regulates, how they regulate, legal liability, privacy, and data collection.”
In the briefing paper, West reviews the benefits and needed policy actions—including better national technical standards, addressing legal liability, and improving data protection and security. “Governments can accelerate or slow the movement towards self-driving vehicles by the manner in which they regulate,” West writes. “Addressing relevant issues and making sure regulatory rules are clear should be high priorities in all the countries considering autonomous vehicles.”
Existing products liability law is adaptable to new issues in autonomous vehicles
John Villasenor, a nonresident senior fellow in Governance Studies, examines the liability issues associated with autonomous vehicles as new technologies continue to advance us into an era of widespread commercial use of vehicle automation. In 2012, Villasenor notes, motor vehicle accidents caused over 33,000 deaths in the United States alone. Just as existing vehicle automation technologies have provided safety improvements, additional automation promises to improve safety even more. In this context, Villasenor argues that “broad new liability statutes aimed at protecting the manufacturers of autonomous vehicle technology are unnecessary.”
In this paper, Villasenor offers a set of guiding principles for legislation. “In short,” he writes, “the liability concerns raised by vehicle automation are legitimate and important. But they can be addressed without delaying consumer access to the many benefits that autonomous vehicles will provide.” He concludes that the U.S. “has a robust products liability law framework that, while certainly not perfect, will be well equipped to address and adapt to the autonomous vehicle liability questions that arise in the coming years.”
The adoption of driverless cars can save thousands of lives each year
Drawing upon research that shows that as unemployment rises, more dangerous drivers drive less and safer ones drive more—thus decreasing traffic deaths—Senior Fellow Cliff Winston and Vikram Maheshri of the University of Houston argue that policymakers “could allow the most dangerous drivers … to continue to have access to an automobile provided it is driverless or at the very least has more autonomy than current vehicles.” Doing so, they say, “will not only save lives but also would “expedite the transition to driverless cars and help educate the public and build trust in the new technology.”
Automated vehicles will save government billions of dollars
As Kena Fedorschak of Arizona State University and Brookings Nonresident Senior Fellow Kevin Desouza observe, state and local governments derive billions of dollars in revenue from speeding tickets, DUIs, towing fees, and other driver-related laws. They argue that while the safety improvements offered by autonomous vehicles will remove these sources of revenue, the technology will save taxpapyers an estimated $10 billion per year by eliminating “inefficiencies” in the transportation system such as congestion, road damage, and deaths.
“Even if the public sector refuses to innovate, government entities will save big bucks from the impending driverless car revolution,” Fedorschak and Desouza conclude. “Billions will be saved as a result of increased safety and the reduction of transportation inefficiencies. The future is bright for autonomous vehicles.”
Iron and phosphate exports as alternatives to oil & gas?
A TV show, that I would not name, on July 27, 2016, deeply shocked me. It involved few so called experts who claimed, without restraint that thanks to exports of phosphate and iron ore, Algeria would face and quite happily overcome the drop in the price of oil. It is as if it is Minerals vs. Oil & Gas Exports.
Unconsciousness or demagogy, misleading both public opinion and policy makers of the country, like those who had promised the Government a the price of oil to get back to $70 a barrel between January and June 2016, whereas it on July 27, 2016 the WTI closed at $41.88 and the Brent at $43,84.
However for either phosphate or iron (raw or semi raw), exploitation would depend on such constraints as those related to the environment, internal strategic management, chemical content, etc. that would also determine all operating costs. These are directly linked to the world economy growth and to the structure and the forthcoming fourth industrial revolution projected to gradually be put into place around 2017/2030. Further to my previous contributions, attached herewith is my analysis as assisted by experts, which I hope will be of some use to the Government.
1 – Phosphate is a key component used in the composition of fertilizers which are of crucial importance for food security worldwide. The reserves are in this order, Morocco with 50,000 million tons (Mt), China – 3,700 Mt, Algeria – 2200 Mt, Syria – 1800 Mt, South Africa – 1500 Mt, Russia – 1300 Mt, Jordan – 1300 Mt, Egypt – 1250 Mt, Australia – 1030 Mt, USA – 1,100 Mt, Saudi Arabia – 950 Mt.
As far as production is concerned, it totalled in 2015, 223 Mt including China with 100 Mt, Morocco 30 Mt, USA 27.6 Mt, Egypt 5.5 Mt, Tunisia 4 Mt, Saudi Arabia 3.3 Mt, Israel 3.3 Mt, Australia 2.6 Mt, Viet Nam 2.6 Mt, Jordan 2.5 Mt and Algeria 2.6 Mt.
The price of raw phosphate was divided by three since its peak of 2008, and had fallen by 43,2% since 2011. The world price stabilized at around $115 (average monthly in 2015) per metric ton.
According to the World Bank, the general trend and medium term of phosphate products prices would remain oriented downward whereby it will most probably be negotiated in 2020 at $80 to $85 a metric ton, of the Di-Ammonium Phosphate (DAP) at around $377.5 a tonne (vs. $464 to the month of April 2015) and the Tri-Sodium Phosphate (T.S.P.) to near $300 a ton against $380 today.
Then if we export three million tons of raw phosphate annually at an average price of $100 between 2017 and 2020, we would make a turnover of $300 million. And because of related costs being very high (notably depreciation and wage costs) at minimum 40%, the net profit would be $180 million.
In the case of association with a partner from overseas under the rule of the 49 / 51%, net profit would be slightly more than $90 million. For a hypothetical annual export averaging 30 million tonnes a year, provided opportunities and heavy investments were there, the net profit would not exceed $1 billion.
It is far from those profits from hydrocarbons. Therefore, to increase the net profit, there is need to engage in highly capital-intensive processing units with heavy investment and profitability in the medium term depending on exported quantities.
Thus, in a competitive market as that of the EU, urea fertilizer sold for more than €350 a ton in 2014 and was on 2016/07/27 at €270 per tonne noting that the high volatility pricing of ammonia on the world market these past three years between €450 and €600 a ton. This is between four to five times that of oil.
But large exportable quantities would require heavy investments and profitability relative average not before 2020 if the project was carried out by 2016. Also it would mean partnership due to the fact that this sector is overseen by a few firms worldwide.
In addition, Algeria should solve the problem of the transfer price of the gas that cannot be aligned with that of the market and at the same time prevent any disputes. In this context, I recommend, following many experts that all matters of petrochemicals is best to be attached to the Department of Energy / SONATRACH for more coherence and effectiveness, and even create a Secretariat of State for all petrochemical industries.
2 – For iron, global reserves were assessed according to international bodies to be 85,000 million tons. Australia is in the lead with 24,000 Mt, followed by Russia with 14,000 Mt, Brazil with 12,000 Mt, China with 7,200 Mt, India with 5200 Mt, United States with 3500 Mt, Venezuela with 2,400 Mt, Ukraine 2,300 Mt, Canada 2,300 Mt and Sweden 2,200 Mt; Algeria is not cited in international statistics but according to Algerian data that could safely be quoted the exploitable deposits should be between 1,500 and 2,000 Mt*.
For production of iron, the whole world’s is of 3.32 billion tonnes, with by far China in the lead followed by Australia and Brazil. It is estimated that there is about 75 to 80 years of world reserves of iron ore (at the current rate of exploitation). China is the leader of the iron ore market as well, with 1.38 billion tonnes of ore extracted, with far behind Australia (824 Mt, Brazil, (428 Mt), India (129 Mt), and Russia (112 Mt). The price of iron does fluctuate and it has been rated on July 27, 2016 at $56 per metric ton.
With reference to the statistics of the EU imports, these have evolved from €84.49 per metric tonne in January 2009, to €116.84 in January 2012, €83.77 in in January 2013, €96.27 in January 2014, €63.51 in January 2015, €48.23 in January 2016 and it is expected that to be between €50 to €58 between September and December 2016 and Canadian Scotiabank specializing in the evolution of the prices of materials provide in its note of economic situation on July 6, 2016, an international award between $48/50 between 2017/2018, depending on especially the recovery of the Chinese economy, Chinese steel mills absorbing 70% of global demand for iron ore, between 2014/2015
At $60 a ton, iron export of 3 million tons/year, would make $180 million sales and with 40% costs taken away would leave $108 million to share as per the rule of the 49 / 51%, giving Algeria less than $55 million. And with 30 million tons a year of exports, net profit for Algeria would not exceed $600 million per year.
The exploitation of the Gara Djebilet railway will require major investments in power plants, transmission networks, rational use of water and sharp human resources training.
So only transformation to noble products could provide a greater added value to export. Thus, the price of steel being very fluctuating amounted to $620 per tonne on July 22, 2016 against $580 dollars per tonne on July 19, 2016-and $449, during the last 12 months: so caution to be exercised not to repeat the negative experience of Al Hadjar.
Of the oligopolistic structure of the mining sector, at the global level, the only solution would be a partnership win / win with renowned firms that might not accept the restrictive rule of the 49 / 51% with its accompanying bureaucracy legacy.
In summary, Algeria needs a strategic vision within which its industrial policy (institutions, financial, tax, customs, federal lands, socio-educational system, the market of labour, land etc.) should fit and adapt to the new chains in perpetual evolution driven by innovation.
Dr. Abderrahmane Mebtoul, University Professor, Expert International, ademmebtoul@gmail.com
Originally posted on Good Food on Bad Plates: We don’t typically make a lot of stews because Toddler Mash doesn’t typically eat them. A couple of weekends ago, though,we ended up making a lamb cobbler on the Saturday and kusksu (Libyan couscous with spicy beef and vegetables) on the Sunday. He surprised us on the…
Originally posted on Imen Bliwa Blog: Abib, Sierra Leone’s immigrant helping a friend’s child while camping in front of UN building in Tunisia Along with many of his friends and neighbors, Abib had to spend days and nights in front of the UN building (IOM). A calm fancy neighborhood next to Tunis Lake turns into…
Originally posted on Mackneen, The Algerian Goldfinch: It’s Spring, like the season then, twelve years ago. Time flies, like a bird. On this day, twelve years ago, I created this blog and I gave it a name: Mackneen,The Algerian Goldfinch. On that day I went to Algiers for a visit to my mother, and to my…
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Ultimately, Trump has missed the point of his counterparts’ pleas to keep the deal in place. This isn’t about whether or not Iran has leeway to build a nuclear weapon; it’s about keeping tensions across the Middle East in check, and preventing a catastrophic new war. Diplomats the world over are in for some sleepless nights.
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