Tuesday, February 04, 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 Power prices in Germany keep sliding, with the year-ahead contract down by about 2 euro to Company 1W YTD ca. EUR 40, driven by falling carbon allowances (-1 euro at EUR 23/t) and coal (-5% w/w). P KN O rlen -1 1 .6 % -1 5 % Nevertheless sentiment towards the sector remains positive, as reflected in 9% gains so far this year in the utilities index. In Poland, power for 2021 delivery has edged 4 zloty lower to Lotos -1 0 .9 % -1 1 % PLN 246/MWh, tracing the declines in EUAs, but this has not affected much the clean-dark LW Bogdanka -9 .9 % -1 4 % spread for a vertically integrated power plant. It is worth noting at the current price levels P GN iG -7 .8 % -1 8 % the cross-border spread between Polish coal and 1Y FWD ARA makes imports borderline PGE -6 .0 % -1 6 % unprofitable at PLN 3 PLN/GJ. Grupa A zoty -4 .7 % -1 4 % Gas & Oil OMV -4 .3 % -1 2 % After holding at $2/bbl for most of the week, the benchmark refining margin rebounded over E nerga -4 .2 % +1 % $4 yesterday after a sharp downward shift in crude oil (-$3). We see this as a temporary improvement amid persistent oversupply pressures while demand remains weak (warm Borys zew -4 .0 % +4 % temperatures, the coronavirus, JET). The Urals/Brent differential has declined to $1/bbl. MOL -3 .5 % -1 3 % Conditions in petrochemicals have not changed much in the last seven days. The gas market IMC -3 .4 % +2 % also remains subdued, with capacity utilization at EU gas storages at 71% vs. 51% this time T upras -3 .2 % -1 2 % last year. As we watch the coronavirus situation unfold, we thought it would be interesting to ZE P A K -2 .9 % -4 % point out that China accounts for 14% of global oil consumption and 7% of the total gas use against respective shares of 4% each in total supply. CEZ -2 .5 % -1 % Kernel -2 .5 % +4 % Soda Ash Prices of soda ash agreed in contracts for 2020 deliveries have increased by several percent T auron -2 .2 % -1 0 % according to market insiders. In addition, Solvay-based producers are capitalizing on low A s tarta -2 .1 % +3 % prices of coking coal and natural gas—all trends which are benefitting Ciech. E nea -1 .6 % -9 % Metals ZC h P olic e -1 .0 % -3 % Temporary production stoppages in China in the wake of the coronavirus outbreak are O rzeł Biały -0 .9 % +1 % raising concerns over global metals demand in Q1 2020. Copper is set to take the biggest hit KGHM -0 .6 % -3 % in our view considering that China accounts for 50% of its global consumption against a 9% P C C Rokita +0 .0 % +4 % share in supply—a disparity which is likely to cause a temporary buildup in world copper stocks, with implications for prices. In fact, the monitored reserves have already started to Krus zwic a +2 .3 % +1 1 % rise. A similar asymmetry between China’s demand/supply proportions also affects aluminum JSW +2 .7 % -8 % (67% vs. 54%) and zinc (45% vs. 34%). ZA P uławy +2 .9 % +3 % Agricultural Commodities C iec h +3 .5 % +1 % As prices of natural gas fall, this is driving the margins of nitrogen fertilizer producers like A lumetal +4 .7 % +1 1 % Grupa Azoty. In addition, we are seeing a recovery in prices of DAP. Reports of potash T arc zyńs ki +5 .4 % -3 % capacity closures indicate a chance for an upward shift in prices of multi-nutrient fertilizers. Kęty +6 .1 % +6 % Global sugar markets continue to move upward, reaching their highest levels since 2017, WIG Indices 1W YTD fueled by concerns over reduced supply from India and Brazil, compounded by predictions of WI G -0 .5 % -2 % a global shortage in 2020 (this is positive for Astarta, SuedZucker). C hemic als -1 .0 % -7 % Coking Coal E nergy -3 .9 % -1 0 % China’s steel reserves remain high due to curbed domestic manufacturing and construction O il & Gas -1 0 .6 % -1 5 % activity, and demand concerns are putting downward pressure on the prices of iron ore and, Food Industry -0 .6 % +5 % to a lesser extent, metallurgical coal. China is responsible for 60% of global met coal Basic Material -0 .6 % -4 % consumption, but accounts for only 45% of the total supply. There is fear that reduced orders will cause a build-up in coal stocks, for example in Australia. U kraine -0 .1 % +5 % Sector Indices 1W YTD M ining -1 .8 % -8 % Chart of the Week O il & Gas E&P -5 .0 % -1 2 % Refining EU -5 .6 % -9 % 22 EU offers cheapest gas in the world 20 Prices of gas for next month’s delivery in EU Refining US -5 .1 % -1 6 % 18 markets have plunged below EUR 10/MWh, A gri & Food -0 .7 % +2 % 16 making them noticeably cheaper than the US Rubber -2 .2 % -1 0 % counterparts, trading at EUR 15/MWh. This 14 Fertilizers +2 .0 % -8 % shows that the persistent downward price 12 push experienced in the EU does not come Chemicals EU +0 .8 % -4 % 10 from imports, but, rather, is a consequence of Industrials EU -0 .6 % -0 % the huge local glut caused by an unseasonably Petchem World -3 .5 % -1 0 % Jul-19 Jan-20 Oct-19 Jun-19 Feb-20 Dec-19 Sep-19 Aug-19 Nov-19 warm winter. Henry Hub delivery to EU Henry Hub delivery to Asia Utilities EU +0 .9 % +9 % NCG Europa 1M JKM LNG Utilities US +1 .5 % +7 % 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 80 55 25 70 50 20 45 15 60 40 10 50 35 5 30 0 40 Jul-19 Jan-19 Jan-20 Oct-18 Oct-19 Jun-19 Apr-19 Jul-19 Feb-19 Feb-20 Mar-19 Dec-18 Dec-19 Sep-18 Sep-19 Aug-18 Aug-19 Nov-18 Nov-19 May-19 Jan-19 Jan-20 Oct-19 Oct-18 Jun-19 Apr-19 Feb-19 Feb-20 Mar-19 Dec-19 Dec-18 Sep-18 Sep-19 Aug-18 Aug-19 Nov-18 Nov-19 May-19 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-18 Oct-19 Jun-19 Apr-19 Feb-19 Feb-20 Mar-19 Dec-19 Dec-18 Sep-18 Sep-19 Aug-18 Aug-19 Nov-19 Nov-18 May-19 Jul-19 Jan-19 Jan-20 Oct-18 Oct-19 Jun-19 Apr-19 Feb-19 Feb-20 Mar-19 Dec-18 Dec-19 Sep-18 Sep-19 Aug-18 Aug-19 Nov-18 Nov-19 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-18 Oct-19 Jun-19 Apr-19 Feb-19 Feb-20 Mar-19 Dec-18 Dec-19 Sep-18 Sep-19 Aug-18 Aug-19 Nov-18 Nov-19 Jan-19 Jan-20 Oct-18 Oct-19 May-19 Jun-19 Apr-19 Feb-19 Feb-20 Mar-19 Dec-18 Dec-19 Sep-18 Sep-19 Aug-18 Aug-19 Nov-18 Nov-19 May-19 Poland-Germany Power Price Spread Green Certificate Prices Weekly Returns of Utility Stocks 6.3% 3.8% 2.9% 2.2% 1.0% 1.1% 0.1% 0.3% -0.5% -1.0% -0.9% -1.6% -2.3% -2.2% -2.9% -2.5% -4.2% -6.0% -5.9% Source: Bloomberg, mBank 2 Utilities MSCI Utilities Europe vs. S&P Utilities S&P Utilities vs. S&P 500 P/E 150 22 25% 21 20% 140 20 15% 130 19 10% 120 18 5% 17 0% 110 16 -5% 100 15 -10% 90 14 -15% Feb-17 Feb-18 Feb-17 Feb-18 Feb-19 Feb-19 Aug-17 Aug-19 Aug-17 Aug-18 Aug-19 Aug-18 Nov-17 Nov-18 Nov-19 Nov-17 Nov-18 Nov-19 May-17 May-18 May-19 May-18 May-19 May-17 EU Utilities US Utilities premium/discount S&P P/E S&P Utilities P/E MSCI Utilities EU vs. DPS & EBITDA Expectations MSCI Utilities EU vs. WIG-ENERGY 130 150 125 140 120 130 120 115 110 110 100 105 90 100 80 95 70 90 60 Feb-17 Feb-18 Feb-17 Feb-18 Feb-19 Feb-19 Aug-17 Aug-19 Aug-17 Aug-19 Aug-18 Aug-18 Nov-17 Nov-18 Nov-19 Nov-17 Nov-18 Nov-19 May-17 May-18 May-19 May-17 May-18 May-19 Utilities EU Utilities DPS EBITDA 12M Fwd MSCI EU Utilities WIG Energy WIG-ENERGY vs.