Andy Critchlow http://blogs.reuters.com/andycritchlow Andy Critchlow's Profile Sat, 07 Nov 2015 00:36:23 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Brazil dam disaster tests BHP’s mega-mining model http://blogs.reuters.com/breakingviews/2015/11/06/brazil-dam-disaster-tests-bhps-mega-mining-model/ http://blogs.reuters.com/andycritchlow/2015/11/06/brazil-dam-disaster-tests-bhps-mega-mining-model/#comments Fri, 06 Nov 2015 15:48:33 +0000 http://blogs.reuters.com/andycritchlow/?p=19 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Industrial accidents on the scale of the Brazilian dam collapse that hit BHP Billiton on Nov. 5 are a nightmare for miners. They are also proof that diversity is still the best model for resources companies when it comes to managing such risks.

More than $3.5 billion was wiped off the Anglo-Australian miner’s market value on Nov. 6 after a broken dam co-owned with rival Vale flooded nearby villages, killing at least two people and destroying land and property. The real financial cost will only emerge later. The broken barrier was a “tailings dam”, containing waste from the iron ore mine, which could add to the eventual cleanup bill.

To be sure, safety at mining companies has improved massively in the past two decades. Automation is one reason. Chief executives of companies like BHP, Rio Tinto and Anglo American talk about their zero-fatality goal, even if they rarely meet it.

When disasters on such a scale hit, though, size matters. Resource companies quickly set aside cash on their balance sheet to pay for any future liabilities. BHP has plenty of funds on hand despite the downturn in commodity prices. It had $6.8 billion of cash and cash-like investments on its balance sheet at the end of June. Although the mining group is smaller after the spinoff of its specialist base metals business into South32 in May, it still holds total assets of $125 billion.

Diversification also helps to absorb the hit from lost production. The Samarco joint venture affected by the disaster accounts for roughly 6 percent of BHP’s iron ore output, and iron in turn provides 33 percent of the group’s revenue, according to Eikon data.

Investors have been so focused on falling commodity prices that they may have forgotten about the inherent risk in the industry. Mining is still dirty and dangerous in many parts of the world. And when accidents do happen, big diversified players like BHP recover fastest.

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Qatar’s austerity drive will be felt beyond Doha http://blogs.reuters.com/breakingviews/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha/ http://blogs.reuters.com/andycritchlow/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha-3/#comments Thu, 05 Nov 2015 16:57:30 +0000 http://blogs.reuters.com/andycritchlow/?p=15 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Qatar has had the feast – now comes the self-imposed famine. The country’s absolute ruler Sheikh Tamim bin Hamad al-Thani on Nov. 3 told his subjects that they should prepare for harder times. After the decade-long splurge that saw Qatar buy significant stakes in companies such as Volkswagen AG, Barclays and Glencore, the belt-tightening won’t just pinch in Doha.

Oil wealth has made Qataris among the world’s richest people, with a GDP per capita close to $100,000, according to the World Bank. But, Sheikh Tamim said, it has encouraged Qataris to be wasteful. Arguably the biggest example is its sovereign wealth fund, which is thought to hold $334 billion in assets. Next year might see Qatar fall to a budget deficit, its first in 15 years.

Holdings in big companies look increasingly unnecessary. Although the fund bought into carmaker Volkswagen, UK lender Barclays and Swiss trader Glencore in unusual circumstances, it arguably has held on too long. On paper it has lost $8 billion on these three holdings over the last year. Gains on other investments may offset that, but lack of disclosure makes it impossible to know the real position.

Managers within the fund are “livid” about these losses, according to a person who deals with them directly. Given that Sheikh Tamim – who ultimately is their boss – is encouraging greater financial caution within his sheikdom, the same presumably extends to his investment empire overseas.

Pricked by its recent experience in Europe the fund is now looking for more stability in the United States, where the economy at least is more predictable. In September, the fund opened its first office in New York and Qatar still plans to allocate $35 billion to the market over the next five years.

Whether it has enough cash to do so depends on energy prices. Qatar shares access to the world’s single-largest proven natural gas field in the Persian Gulf and accounts for just under a third of global liquefied natural gas (LNG) shipments. Spot price declines for LNG in Asia have outstripped falls in crude this year. Qataris are being told to expect fewer handouts. Companies and funds who have benefitted from the country’s largesse should do the same.

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Qatar’s austerity drive will be felt beyond Doha http://blogs.reuters.com/breakingviews/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha/ http://blogs.reuters.com/andycritchlow/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha-2/#comments Thu, 05 Nov 2015 16:57:30 +0000 http://blogs.reuters.com/andycritchlow/?p=14 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Qatar has had the feast – now comes the self-imposed famine. The country’s absolute ruler Sheikh Tamim bin Hamad al-Thani on Nov. 3 told his subjects that they should prepare for harder times. After the decade-long splurge that saw Qatar buy significant stakes in companies such as Volkswagen AG, Barclays and Glencore, the belt-tightening won’t just pinch in Doha.

Oil wealth has made Qataris among the world’s richest people, with a GDP per capita close to $100,000, according to the World Bank. But, Sheikh Tamim said, it has encouraged Qataris to be wasteful. Arguably the biggest example is its sovereign wealth fund, which is thought to hold $334 billion in assets. Next year might see Qatar fall to a budget deficit, its first in 15 years.

Holdings in big companies look increasingly unnecessary. Although the fund bought into carmaker Volkswagen, UK lender Barclays and Swiss trader Glencore in unusual circumstances, it arguably has held on too long. On paper it has lost $8 billion on these three holdings over the last year. Gains on other investments may offset that, but lack of disclosure makes it impossible to know the real position.

Managers within the fund are “livid” about these losses, according to a person who deals with them directly. Given that Sheikh Tamim – who ultimately is their boss – is encouraging greater financial caution within his sheikdom, the same presumably extends to his investment empire overseas.

Pricked by its recent experience in Europe the fund is now looking for more stability in the United States, where the economy at least is more predictable. In September, the fund opened its first office in New York and Qatar still plans to allocate $35 billion to the market over the next five years.

Whether it has enough cash to do so depends on energy prices. Qatar shares access to the world’s single-largest proven natural gas field in the Persian Gulf and accounts for just under a third of global liquefied natural gas (LNG) shipments. Spot price declines for LNG in Asia have outstripped falls in crude this year. Qataris are being told to expect fewer handouts. Companies and funds who have benefitted from the country’s largesse should do the same.

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Qatar’s austerity drive will be felt beyond Doha http://blogs.reuters.com/breakingviews/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha/ http://blogs.reuters.com/andycritchlow/2015/11/05/qatars-austerity-drive-will-be-felt-beyond-doha/#comments Thu, 05 Nov 2015 16:57:30 +0000 http://blogs.reuters.com/andycritchlow/?p=13 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Qatar has had the feast – now comes the self-imposed famine. The country’s absolute ruler Sheikh Tamim bin Hamad al-Thani on Nov. 3 told his subjects that they should prepare for harder times. After the decade-long splurge that saw Qatar buy significant stakes in companies such as Volkswagen AG, Barclays and Glencore, the belt-tightening won’t just pinch in Doha.

Oil wealth has made Qataris among the world’s richest people, with a GDP per capita close to $100,000, according to the World Bank. But, Sheikh Tamim said, it has encouraged Qataris to be wasteful. Arguably the biggest example is its sovereign wealth fund, which is thought to hold $334 billion in assets. Next year might see Qatar fall to a budget deficit, its first in 15 years.

Holdings in big companies look increasingly unnecessary. Although the fund bought into carmaker Volkswagen, UK lender Barclays and Swiss trader Glencore in unusual circumstances, it arguably has held on too long. On paper it has lost $8 billion on these three holdings over the last year. Gains on other investments may offset that, but lack of disclosure makes it impossible to know the real position.

Managers within the fund are “livid” about these losses, according to a person who deals with them directly. Given that Sheikh Tamim – who ultimately is their boss – is encouraging greater financial caution within his sheikdom, the same presumably extends to his investment empire overseas.

Pricked by its recent experience in Europe the fund is now looking for more stability in the United States, where the economy at least is more predictable. In September, the fund opened its first office in New York and Qatar still plans to allocate $35 billion to the market over the next five years.

Whether it has enough cash to do so depends on energy prices. Qatar shares access to the world’s single-largest proven natural gas field in the Persian Gulf and accounts for just under a third of global liquefied natural gas (LNG) shipments. Spot price declines for LNG in Asia have outstripped falls in crude this year. Qataris are being told to expect fewer handouts. Companies and funds who have benefitted from the country’s largesse should do the same.

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LNG moves from blessing to curse for BG/Shell http://blogs.reuters.com/breakingviews/2015/10/30/lng-moves-from-blessing-to-curse-for-bgshell/ http://blogs.reuters.com/andycritchlow/2015/10/30/lng-moves-from-blessing-to-curse-for-bgshell/#comments Fri, 30 Oct 2015 14:20:29 +0000 http://blogs.reuters.com/andycritchlow/?p=11 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Liquefied natural gas is taking the shine off Shell’s $70 billion takeover of BG Group. When the Anglo-Dutch major launched its deal in April, LNG was one of the main ways it justified the deal to investors. That line of argument doesn’t look so convincing now.

BG’s third-quarter results, released on Oct. 30, showed marketing and shipping of LNG taking a big hit. Despite the company revising higher its earnings expectations for the segment in 2015, revenue slumped 65 percent year-on-year, against a 9 percent top-line fall for the overall group.

That’s a problem. Long term, the combination will create the world’s largest LNG shipper with around 14 percent of the global market for the fuel, which is natural gas chilled to a liquid and then transported to customers by giant tanker. But Shell needs LNG to contribute in order to justify the 50 percent premium it offered in April to secure BG.

BG, for its part, remains confident that its LNG business will hit earnings guidance in the region of $1.4 billion this year. But the sector is under the gun to an even greater degree than crude oil prices, which have fallen by 43 percent since last October, and off which BG links most of its LNG contracts.

LNG markets have entered a deep downturn due to a mixture of global oversupply and rapidly weakening demand in Asia. BG Group estimates that global supply of the fuel will grow by 50 percent to around 375 million tonnes annually by 2020 as a series of LNG developments that have been decades in the planning come online. Compared with oil, complex LNG projects are harder to defer due to the long-term nature of the business.

Shell, which on Oct. 29 said it was taking a net charge of $7.9 billion on project writeoffs, is battling the oil slump as best as it can. If it was hoping BG’s LNG capabilities could brighten the otherwise grim outlook, it should think again.

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Energy subsidies will test Saudi’s pain threshold http://blogs.reuters.com/breakingviews/2015/10/29/energy-subsidies-will-test-saudis-pain-threshold/ http://blogs.reuters.com/andycritchlow/2015/10/29/energy-subsidies-will-test-saudis-pain-threshold-2/#comments Thu, 29 Oct 2015 16:23:54 +0000 http://blogs.reuters.com/andycritchlow/?p=8 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Saudi Arabia faces an unenviable decision: cut energy subsidies, or concede defeat in its oil price war. Its decision to consider the former will test the kingdom’s pain threshold.

Oil prices of around $50 a barrel are a problem for Saudi, which already foregoes a chunk of potential revenue by providing its own people and companies with low-cost electricity, fuel and gas. Based on estimates from the International Monetary Fund, the cost is $107 billion a year – equivalent to $3,395 per person.

That is punching a hole in Saudi’s finances. The International Monetary Fund forecasts that the Saudi budget could blow out to 20 percent of GDP this year. Cheap energy has also encouraged heavy use. Demand in the kingdom is rising by an annual rate of 8 percent, diverting crude oil that might otherwise be sold at higher prices via export. A plan to replace many oil-burning power plants with cheaper natural gas and eventually nuclear is years, and billions of dollars of investment, away.

On paper, ditching subsidies would close around two-thirds of the budget shortfall. In reality, things aren’t so easy. Saudis consider paying around 15 U.S. cents per litre for a tank of gasoline almost as a birthright. Gas-guzzling vehicles and powerful air conditioning are de rigueur. The kingdom’s power plants can consume up to 900,000 barrels of crude a day during the hottest months, almost a tenth of Saudi’s total oil output.

Still, weaning the country off subsidies looks hard to avoid. It would be unlikely to cause severe political unrest, even though higher energy costs would push up inflation that most recently came in at 2.3 percent. Saudi’s neighbour, the United Arab Emirates, stopped subsidising gasoline in July and the transition has so far been smooth. Plans to reduce energy handouts have been on the Saudi government’s agenda for over a decade.

Saudi could always narrow its budget hole in other ways – by using more of its foreign currency reserves, or by curbing its production and allowing oil prices to rise. For now it seems more intent on keeping prices low and squeezing higher-cost drillers to win market share. Cutting subsidies won’t make that battle any easier, but it will allow Saudi to prolong the war a little longer.

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Energy subsidies will test Saudi’s pain threshold http://blogs.reuters.com/breakingviews/2015/10/29/energy-subsidies-will-test-saudis-pain-threshold/ http://blogs.reuters.com/andycritchlow/2015/10/29/energy-subsidies-will-test-saudis-pain-threshold/#comments Thu, 29 Oct 2015 16:23:54 +0000 http://blogs.reuters.com/andycritchlow/?p=7 The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Saudi Arabia faces an unenviable decision: cut energy subsidies, or concede defeat in its oil price war. Its decision to consider the former will test the kingdom’s pain threshold.

Oil prices of around $50 a barrel are a problem for Saudi, which already foregoes a chunk of potential revenue by providing its own people and companies with low-cost electricity, fuel and gas. Based on estimates from the International Monetary Fund, the cost is $107 billion a year – equivalent to $3,395 per person.

That is punching a hole in Saudi’s finances. The International Monetary Fund forecasts that the Saudi budget could blow out to 20 percent of GDP this year. Cheap energy has also encouraged heavy use. Demand in the kingdom is rising by an annual rate of 8 percent, diverting crude oil that might otherwise be sold at higher prices via export. A plan to replace many oil-burning power plants with cheaper natural gas and eventually nuclear is years, and billions of dollars of investment, away.

On paper, ditching subsidies would close around two-thirds of the budget shortfall. In reality, things aren’t so easy. Saudis consider paying around 15 U.S. cents per litre for a tank of gasoline almost as a birthright. Gas-guzzling vehicles and powerful air conditioning are de rigueur. The kingdom’s power plants can consume up to 900,000 barrels of crude a day during the hottest months, almost a tenth of Saudi’s total oil output.

Still, weaning the country off subsidies looks hard to avoid. It would be unlikely to cause severe political unrest, even though higher energy costs would push up inflation that most recently came in at 2.3 percent. Saudi’s neighbour, the United Arab Emirates, stopped subsidising gasoline in July and the transition has so far been smooth. Plans to reduce energy handouts have been on the Saudi government’s agenda for over a decade.

Saudi could always narrow its budget hole in other ways – by using more of its foreign currency reserves, or by curbing its production and allowing oil prices to rise. For now it seems more intent on keeping prices low and squeezing higher-cost drillers to win market share. Cutting subsidies won’t make that battle any easier, but it will allow Saudi to prolong the war a little longer.

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