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How Mexico’s Pemex went from cash cow to financial drain



Good morning. Our top story today comes from Mexico — a tale of the colossal price the country is paying to keep funding the state-owned oil and gas company, Pemex.

Our second note is on how the American Petroleum Institute, Washington’s powerful oil lobbyist, plans to deal with a new US government led by the man who said, ahead of the election, he would bring a “transition away from oil”.

The key points from consultancy McKinsey’s annual energy outlook, new forecasts from the Energy Information Administration, and some brutal clean energy job losses round out today’s newsletter.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

Mexico’s former cash cow drains the nation’s wallet

Propping up state oil company Pemex is costing Mexico’s cash-strapped government at least 1.4 points of GDP a year, according to Moody’s Investors Service and a senior former public official.

Pemex is a priority of populist President Andrés Manuel López Obrador, who sees the former monopoly as a lever of national development. He is investing heavily in a new refinery despite the company’s downstream activities losing money hand over fist and the firm suffering negative cash flow overall.

“Supporting Pemex in 2021, for the company to cover its financing needs, could impose a financial burden of up to $14.7bn or 1.4 per cent of GDP on the sovereign, in addition to the already budgeted transfer of $2.3bn to build the Dos Bocas refinery,” Moody’s said in a report.

That, however, is just to keep things muddling along for Pemex, rather than allowing it to boost production significantly.

“If the government was to provide additional capex of $10bn, which we estimate is the amount required on an annual basis to lift production on a sustained basis, the cost would rise to around $25bn or 2.3 per cent of GDP each year,” Moody’s said.

That chimes with the estimates of a senior public official, who told the FT that Pemex had “burnt through 300bn pesos” in 2020 — some 1.5 points of GDP. “It’s an incredible amount,” added the former official, who expected the company to need state support “very soon in 2021”.

The government has resorted to increasingly creative ways to help the nation’s former cash cow, as the nationalist Mr López Obrador continues to prohibit Pemex from sharing risk by partnering with private companies in exploration and production.

Supporting state oil company Pemex is placing an enormous burden on the Mexico’s government. © REUTERS

Nymia Almeida, Moody’s senior vice-president and a Pemex analyst, said that last year Pemex had been given about half the aid it received in 2019. That it had managed to keep production about stable when its main fields were mature and declining at 25 per cent a year was no mean feat, she said.

“The challenges are still the same: high tax and debt,” Ms Almeida said. Pemex is already the world’s most indebted oil company, with net debt of $110.3bn at the end of the third quarter of 2020 and $6bn due this year.

Pemex’s debt has already been downgraded to junk but could be at risk of further pressure if Mexico’s sovereign debt rating is cut — something that is no longer most analysts’ base case for this year unless economic recovery is badly delayed.

“The main trigger [to downgrade] Pemex is the sovereign,” said Ms Almeida. “In other years, it’s been the other way round.” (Jude Webber in Mexico City)

API readies to face off against the Biden administration

The American Petroleum Institute laid down battle lines with the incoming Biden administration during the group’s annual “State of American Energy” event yesterday.

Mike Sommers, the API’s president, said he “looked forward to working with” the new administration. But his speech made clear that there will be many more areas of conflict than co-operation.

On a federal leasing ban:

In response to the Biden team’s proposal to restrict drilling on federal land, Mr Sommers zeroed in on New Mexico — home to a fast-growing area of the Permian basin.

He argued a ban could cost New Mexico billions of dollars in state revenue and tens of thousands of jobs, appealing directly to Deb Haaland, a congresswoman from the state who Mr Biden has nominated to head his Interior Department.

“I hope that the new secretary of Interior, despite her previous positions on our industry, comes to understand the importance of development of our federal lands,” Mr Sommers said.

API boss Mike Somers said he ‘looked forward’ to working with the Biden administration. © Bloomberg

On new pipeline projects:

Mr Biden will be under pressure from progressives in his party to block construction of new oil and gas pipelines. Major projects like Keystone XL and the Dakota Access Pipeline hang in the balance.

“Each one of them is a magnet for obstruction and litigation,” said Mr Sommers, arguing the US would need “many more miles” of pipelines in the years to come.

On the California model:

Mr Sommers painted California as a cautionary tale to make a case against deploying clean energy mandates to achieve emissions targets. Mr Biden wants to make the grid emissions-free by 2035.

“California is trying to force an energy change that it simply isn’t ready for and technology doesn’t exist to support, putting its residents at risk,” Mr Sommers said pointing to a spate of blackouts during last Summer’s heatwaves. “No one should be surprised when reality keeps interfering.”

(Justin Jacobs)

McKinsey throws cold water on the outlook of a warming planet

The energy transition is accelerating, but the rise of renewables and peaking of fossil fuels will not happen fast enough to prevent catastrophic climate change.

That’s the gloomy takeaway from McKinsey & Company’s big new Global Energy Perspective report.

Some of its other conclusions:

Green power is king . . . Renewables will dominate the electrification trend: they will be cheaper than the marginal cost of fossil fuel plants by 2030 and account for half of power supply by 2035. Green hydrogen will be cost competitive in the 2030s (and a $100 carbon tax of around $100 per tonne would boost hydrogen demand significantly).

. . . but fossil fuels will stick around. Oil consumption will peak in 2029, followed by natural gas in 2037. Coal peaked in 2014 and will keep falling. But fossil fuels will still meet more than half of energy demand by 2050 and oil and gas will still suck up 50 per cent of investment by 2035.

The outlook for climate is bleak. Emissions need to halve by 2030 to restrict global warming to 1.5ºC warming — the threshold to avoid drastic global warming effects, says McKinsey. But energy-related emissions will remain flat until 2030, in the consultancy’s reference scenario, and then fall by just 25 per cent by 2050. Emissions in 2050 in McKinsey’s reference case are seven times higher than in its 1.5ºC scenario.

Policy is key to the energy transition. The pace of the energy shift remains swift. Wind costs have fallen by almost half in the past 10 years; those for solar and battery by 78 per cent. In 2017, 70 cities had announced measures against internal combustion engines. That number now sits at 200. Policy is what matters, McKinsey believes. (Derek Brower)

Data Drill

Coal-fired electricity generation is set to rise in the US over the next two years — and with it carbon emissions, according to the US Energy Information Administration’s latest Short Term Energy Outlook.

As we reported in November, an anticipated rise in natural gas prices will push power generators back towards more economical coal in the near term. The EIA now estimates the cost of gas-fired generation will jump by more than 40 per cent this year. As a result, coal’s bounceback will continue beyond 2021 and into 2022.

Line chart of US electricity generation by source (%) showing Coal-fired power is set to rebound over the next two years

That will, in part, ensure that last year’s pandemic-induced fall in greenhouse gas emissions is short-lived. As coal usage rises, so will the energy sector’s CO2 pollution.

Line chart of Million tonnes CO2 showing US energy emissions will return to growth in 2021 and 2022

Power Points

  • Japanese electricity prices hit all-time highs as a cold snap coincided with tight LNG supplies, raising fears of blackouts.

  • River dams in the US are gaining attention as a potential zero-carbon electricity source amid a truce between environmentalists and the hydropower industry. 

  • The scrapping of plans to build an export terminal on the Pacific coast scuppered US coal miners’ last-ditch hope for shipping big volumes to Asia.


The pandemic was terrible for oil and gas jobs. But clean energy employment was hit hard too — and is struggling to bounce back.

Despite the addition of almost 17,000 jobs in December, around 429,000 people previously employed by the sector remain out of work, according to an analysis released yesterday by BW Research Partnership. A staggering 70 per cent of the jobs lost have yet to be recovered.

Gregory Wetstone, chief executive of the American Council on Renewable Energy, described the sector’s recovery as “anaemic” and called on the incoming Biden administration to “finally enact the kind of comprehensive, long-term, scientifically-driven climate policy that puts millions to work”.

The president-elect has pledged to bolster the sector with the investment of $2tn in clean energy jobs (though he will probably struggle to get the full amount through Congress).

That support will need to come quickly. At the current rate of recovery, BW reckons, the sector will not reach pre-Covid employment levels until 2023. 

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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Copper hits record high with demand expected to rise sharply




Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.

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Wall Street stocks waver as investors await US jobs data




Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.

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Gensler raises concern about market influence of Citadel Securities




Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”

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