Tuesday, May 26, 2020 | weekly publication Tuesday Espresso Weekly Commodity Roundup Analysts: Kamil Kliszcz +48 22 438 24 02, Jakub Szkopek +48 22 438 24 03 Utilities 1-Week & YTD Performance German power contracts inched up to EUR 38/MWh over the week, led mainly by a Company 1W YTD continued rise in EUA, now back above EUR 21/t. Quotes for coal and natural gas are OMV -4 .6 % -4 0 % trending downward, but this has not helped to lift the model clean-dark spread as of yet. Utilities in Poland so far are not seen to be passing the rising emission costs onto end users, MOL -3 .8 % -3 2 % and as a consequence their average CDS has narrowed by another 3-4 zlotys. The load P KN O rlen -2 .2 % -2 7 % factors of most major power stations remain below the levels recorded this time last year. At T upras -2 .1 % -3 7 % PGE's Bełchatów power station, where the amount of compensation paid for state-mandated E nea -1 .1 % -3 1 % production caps is not enough to fully offset lost margins, the capacity factor for May is as much as 8 percentage points lower than in May 2019, and the year-over-year decline for the KGHM -0 .8 % -1 6 % quarter to date is 6pp. The situation at the Turów facility is not as bad, with the energy Borys zew -0 .5 % -1 4 % availability factor seen to have increased. Utility indices in the US and Europe have not PGE -0 .2 % -4 7 % moved much over the past week. In Poland, the power sector is still in anticipation mode Lotos -0 .1 % -3 0 % ahead of the eagerly-awaited announcement of an updated national energy strategy. IMC 0 .4 % -5 % Gas & Oil E nerga 0 .9 % 11% Oil prices are on a firm upward trend, rising amid an upbeat market mood reflected in a ZE P A K 1 .1 % -3 % seven-week-straight increase in speculator bets. On the downside, refinery profits remain O rzeł Biały 1 .1 % -1 5 % under pressure, underpinned by persistently high inventories (in case of diesel the stockpile ZA P uławy 1 .3 % -1 0 % is still rising). The losses generated on a negative model refining margins (-$1/bbl) are exacerbated by a negative Urals/Brent spread (-$0.8/bbl). Under these circumstances, JSW 1 .6 % -3 6 % refiners are not likely to want to ramp production back up to pre-crisis levels as quickly as CEZ 1 .9 % -5 % originally thought, which means weak second-quarter earnings will probably be followed by a LW Bogdanka 2 .1 % -4 4 % difficult third quarter. In Petchem, margins on polymers are still shrinking while margins on A lumetal 2 .2 % -6 % olefins have rebounded from very low levels. In gas, spot prices are testing fresh lows (EUR 4/MWh) on a seasonal decline in demand amid a persistent oversupply, but contracts ZC h P olic e 2 .8 % 7% for 2021 deliveries are still holding firmly above our baseline price scenario for the year. Krus zwic a 2 .9 % 18% T auron 4 .0 % -2 8 % Metals P GN iG 4 .2 % -1 1 % Metal prices have been weighed down by rising tensions between the US and China. China is the leading global demand driver, with its copper inventory reduced by 15% over the past Kęty 4 .7 % 0% week. In the zinc market, global stocks are down 37% compared to a high recorded in March Kernel 5 .3 % -5 % (a positive signal for STP). T arc zyńs ki 6 .4 % -7 % P C C Rokita 8 .2 % 0% Coking Coal Met coal prices are headed south again after a short-lived rebound (a negative signal for C iec h 8 .3 % 3% JSW). A report by Argus Media last week revealed that China might be mulling further curbs A s tarta 1 1 .1 % 0% on Australian coking coal imports to mitigate oversupply risk. The past week did not bring Grupa A zoty 1 3 .0 % 5% major developments in the steel market, where continuing draws have still not brought WIG Indices 1W YTD China's record-high inventory down to levels that could trigger a global price shift; producers WI G 1 .2 % -2 0 % of sheet steel have been able to raise prices, but billet, rebar, and others, have not moved. Consequently, BOF steel producers like ArcelorMittal, VoestAlpine, and Salzgitter may see C hemic als 1 0 .1 % 4% their profits squeezed. E nergy 0 .7 % -3 0 % O il & Gas -0 .5 % -2 4 % Agricultural Commodities Food Industry 3 .7 % -3 % Fertilizer margins should be expanding as costs of natural gas fall lower and lower from week to week, however due to seasonal sale offers on prices of ammonium nitrate and its Basic Material -0 .7 % -1 8 % mixtures with calcium (CAN), and urea (UAN) sales margins in Europe have been squeezed U kraine 3 .4 % -3 % in recent weeks (a negative signal for Grupy Azoty, Yara). The downward-trending energy Sector Indices 1W YTD prices (gas, coking coal) can potentially boost the profits of Ciech. M ining 7 .5 % -1 2 % Chart of the Week: Copper price (PLN/t) and speculative positioning (ths contracts) O il & Gas E&P 0 .6 % -3 9 % Refining EU 1 .5 % -3 0 % 27,000 80 Will speculators raise bearish bets Refining US 1 2 .2 % -3 3 % 26,000 60 around US-China feud? 25,000 40 Net speculative positions in copper are down A gri & Food -1 .1 % -2 % 24,000 20 to -13,000 after a period of position closing by Rubber 2 .5 % -3 0 % 23,000 0 short speculators, from -46,000 recorded in Fertilizers 5 .3 % -1 1 % 22,000 -20 mid-February. However as tensions between Chemicals EU 2 .4 % -1 2 % 21,000 -40 the US and China start back up speculative 20,000 -60 shorts can be expected to increase again, with Industrials EU 2 .7 % -1 9 % implications for copper prices which in one of Petchem World 6 .8 % -2 4 % Jun-18 Jun-19 Jun-17 the scenarios could fall to the 2019 third- Mar-18 Mar-19 Mar-20 Dec-17 Dec-18 Dec-19 Sep-19 Sep-18 Sep-17 Utilities EU 1 .4 % -8 % Cu+Premium (lhs) Net Specs Pos. (rhs) quarter low of PLN 20,000 per tonne. Utilities US +3 .2 % -1 2 % Source: Bloomberg, mBank Utilities EU Prices of Electricity (EUR/MWh) & EUAs (EUR/t) ARA Coal Spot and Forward Prices (EUR/t) 65 35 90 60 30 75 55 25 50 20 60 45 15 40 10 45 35 5 30 0 30 Jul-19 Jan-19 Jan-20 Oct-19 Jun-19 Apr-20 Apr-19 Jul-19 Feb-19 Feb-20 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 May-20 May-19 Jan-20 Jan-19 Oct-19 Jun-19 Apr-19 Apr-20 Feb-19 Feb-20 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 May-19 May-20 EUA (EUR/t, rhs) Electricity (EUR/MWh, lhs) ARA Coal Spot ARA Coal Forward Clean-Dark Spread, Germany (EUR/MWh) Polish Electricity Prices (1Y) (PLN/MWh) 4 325 240 3 300 220 2 275 200 1 250 180 0 225 160 -1 200 140 -2 175 120 -3 Jul-19 Jan-19 Jan-20 Oct-19 Jun-19 Apr-19 Apr-20 Feb-20 Feb-19 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 May-19 May-20 Jul-19 Jan-19 Jan-20 Oct-19 Jun-19 Apr-19 Apr-20 Feb-19 Feb-20 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 May-20 May-19 Price ex. EUA (0.9t/MWh) POLPX 1Y Contract CDS 2021 (CO2 intensity 0.9t/MWh, efficiency 37.6%) Poland-Germany Power Price Spread (PLN/MWh) Polish Green Certificate Prices (PLN/MWh) 80 180 70 160 60 140 50 120 40 100 30 80 20 60 10 40 Jul-19 Jan-19 Jan-20 Jul-19 Oct-19 Jun-19 Apr-19 Apr-20 Feb-19 Feb-20 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 Jan-19 Jan-20 Oct-19 May-19 May-20 Jun-19 Apr-19 Apr-20 Feb-19 Feb-20 Mar-19 Mar-20 Dec-18 Dec-19 Sep-19 Aug-19 Nov-18 Nov-19 May-19 May-20 Poland-Germany Power Price Spread Green Certificate Prices Weekly Returns of Utility Stocks 9.2% 5.8% 4.0% 4.3% 4.6% 1.9% 2.0% 1.1% 0.3% 0.6% 0.9% -0.5% -0.2% -1.5% -1.1% -1.1% -6.0% -5.7% -7.9% Source: Bloomberg, mBank 2 Utilities MSCI Utilities Europe vs. S&P Utilities S&P Utilities vs. S&P 500 P/E 145 22 25% 21 20% 130 20 15% 19 10% 18 5% 115 17 0% 16 -5% 100 15 -10% 14 -15% 85 13 -20% Jun-17 Jun-19 Jun-17 Jun-18 Jun-19 Jun-18 Mar-18 Mar-19 Mar-18 Mar-19 Mar-20 Mar-20 Dec-17 Dec-19 Dec-17 Dec-18 Dec-19 Dec-18 Sep-17 Sep-18 Sep-19 Sep-17 Sep-18 Sep-19 EU Utilities US Utilities premium/discount S&P P/E S&P Utilities P/E MSCI Utilities EU vs.