Commodities Weekly #4

Welcome back to the fourth edition of Commodities Weekly with Capital and Conflict.

ADNOC’s Santos Bid Fails: Why Did Abu Dhabi Walk Away from More Oil?

The huge energy deal that had the potential to be recorded as Australia’s largest all cash takeover just fell over. A consortium that was led by Abu Dhabi’s ADNOC, using its newly founded international investment arm XRG, alongside ADQ and Carlyle, stepped away from an $18.7 billion cash offer for one of Australia’s largest energy groups, Santos.

On the day of the walk out, Santos shares fell sharply, dropping about 12 to 14 percent as the takeover premium that it gained from its announced bid in June evaporated. Let's begin with a quick introduction to both players that were involved in the deal. ADNOC, the Abu Dhabi National Oil Company, is the state-owned energy company of Abu Dhabi and the 12th largest oil producer globally. In November 2024 it launched XRG, an investment platform built to buy international natural gas, chemicals, and lower-carbon energy assets, with a stated initial enterprise value of $80 billion and a plan to more than double its asset value over the next decade.

Santos is Australia’s number two gas producer, with exposure to LNG and operating across Australia, United States and Papua New Guinea. On paper, it seemed like a very neat fit. It allowed ADNOC to tap into Australian LNG flows and gave Santos an extremely financially secure owner, plus being state backed for long-life gas. Initially, the consortium had offered A$8.89 per share in June representing a 28% premium over Santos's last trading price. The bid aimed for an $18.7 billion acquisition of Santos.

Two smaller proposals in March had already been rejected. Traders kept a discount in the Santos share price because they were not convinced every hurdle would be cleared in time of which turned out to be right.

Well, why did it end up going south then?

Officially, the bidders and Santos could not agree final commercial terms. XRG explained: “While the consortium maintains a positive view of the Santos business, a combination of factors, when considered collectively, have impacted the consortium’s assessment of its indicative offer. Following a comprehensive evaluation and taking into account all commercial factors and the terms of the scheme implementation Agreement (SIA) required by the Santos Board, the consortium has determined that it will not be proceeding with the proposed transaction.”

Reporting points to a bundle of further issues. There were questions around tax and national-interest settings, and around how domestic gas supply commitments would be handled. A long running methane leak story around the Darwin LNG complex also surfaced during due diligence conducts. Santos pushed back, saying the issue had long been known to regulators and was not material. The talks were running on a tight clock, and the bidders chose to withdraw rather than extend.

The politics here are not small. Australia screens foreign takeovers of strategic energy assets, and it has become more vocal about keeping enough gas for the domestic market. That does not stop deals, but it adds time and conditions. State-backed buyers must show exactly how they will meet local supply, tax, and environmental rules. Price alone is not enough. In this case the process and the timetable did not meet in the middle.

For Santos, the near-term market impact was obvious. The quick premium disappeared, brokers cut ratings, and the focus snapped back to delivery rather than M&A. Management said it had been ready to finalise terms earlier in the week, then received the withdrawal the next day. Investors will now judge the company on project execution and cash flow, not on the prospect of a sale.

Walking away from the deal is not an act of retreat from ADNOC’s global plan. It shows deal discipline. XRG was set up to buy at scale across gas, chemicals, and lower carbon solutions, and that mandate has not changed. The lesson is about choosing targets where the approval path is clearer, and the timetable allows for the level of review that strategic energy assets now face. What does it mean for markets. In the short term, more of the valuation risk sits with Santos, not with buyers. The share price will track project milestones and operating cash flow. Medium term, Australia keeps control of a major gas supplier, which suits a policy stance that wants stable LNG exports to Asia and adequate domestic supply.

For buyers like ADNOC, the message is to expect longer clocks, heavier due diligence, and very explicit commitments on local supply and emissions. Deals will still happen, but only when all needs of criteria are met. The final takeaway is simple. Legal tender only moves a deal so far. Licence to operate closes it. Santos now must earn back the market’s belief the usual way, via production and cash generation. ADNOC and XRG will look for the next opportunity where price, policy, and timing all cooperate.

Smelting point: Aluminium market heats up as supply tightens

Aluminium prices could potentially surge in the future, following this week’s news. It was announced that US Midwest premiums increased a dramatic 177% from last year. Citi has warned of a big structural deficit looming in the near future. Aluminium is a major metal in everyday objects, including cars, cans, electrical appliances, and doors. It also plays a vital role in the creation of renewable technologies. This article will explain the news of this week and the concerns it raises.

Aluminium critical to future energy:

With its high tensile strength, recyclability, corrosion resistance, and conductivity, aluminium is critical to renewable technology production. It is used in direct production, protection, and transportation (wiring) of solar panels, wind turbines, and electric vehicles. Environmental government mandates, individual company ESG considerations, and a global shift away from fossil fuels have driven demand from all types of companies worldwide.

China Sticks to Its Guns

China produces 60% of the world’s aluminium. It is ebbing ever closer to its self-imposed cap of 45 million tonnes per year. The cap ensures that China meets its carbon emission reduction targets, as smelting aluminium is a very power-intensive process. In 2021, China reduced smelter output to conserve electricity for households and more critical industries. There's also a strategic industrial aspect, as China’s carbon policies force smelting modernisation and innovation. The upshot is that China, responsible for 60% of the market, is approaching an unmovable ceiling.

European smelters are also feeling the heat. This week, Reuters noted a reduction in production outside China. High electricity prices and declining ore grades contribute to the increasing costs of smelting.

Warning signs:

• Prices have fluctuated but show short-term consolidation

• Midwest premiums have shot up 177% from last year

• LME inventories are dwindling

• Prices have spiked 5% this week in places like India

This week has seen prices fluctuate between $2,666.00 and $2,702.00 per metric ton, signalling ongoing market volatility. Is this going to continue? Futures and spot prices have been relatively stable over the last couple of weeks. This could potentially give a window of opportunity for investors and manufacturers to plan ahead. Despite market consolidation, a longer-term imbalance between supply and demand may drive a significant increase in the short-term.

Premiums have risen as buyers are willing to pay more for aluminium due to its scarcity. Premiums incorporate delivery costs and scarcity value. Such a large increase could concern manufacturers as they fiercely compete for resources.

Inventory drops show that supply is tight, as withdrawal rates are outpacing current aluminium deliveries. Backwardation occurs when futures prices are lower than the current spot prices. Maintaining stockpiles and storage enables large traders like Mercuria to ensure they meet future demands and contracts, rather than selling now and risking having to buy aluminium later at a higher price to fulfil these future contracts. Mercuria did the opposite and withdrew 100,000 tonnes because they needed the physical metal immediately for clients, showing strong real demand.

AL News has reported this week a 5% price rise from Indian producers (Vedanta, NALCO, and Hindalco). They cite rising geopolitical tensions and declining inventories. The 5% surge in Indian aluminium prices highlights localised supply pressures, indicating that regional markets are already feeling the effects of tighter global supply.

All of these back analysts' forecasts of a wild swing from surplus to deficit.

What this means for key players:

A bullish market is emerging. Buying physical forms of aluminium or investing in futures may be beneficial if prices continue to rise. Manufacturers could lock in a future price to hedge against potential future price hikes, so that they can meet production needs if the spot price rises. Speculative investors and traders should consider investing in aluminium futures, amidst long term bullish projections. without incurring risks and storage charges linked to storing physical metal. Citi projects that aluminium prices could surge to $3,000 per tonne by mid-2026. Large mining companies can expect a stock value increase resulting from aluminium demand and price increases.