The Natural Resources and Utilities (NRU) Sector: Better Times
By David Andrada, Global Sector Head, Natural Resources & Utilities – Global Liquidity & Cash Management, HSBC
After a challenging period of lower prices, things are looking far more positive for the NRU Sector. As David Andrada, Global Sector Head, Natural Resources & Utilities – Global Liquidity & Cash Management at HSBC explains, this means that treasuries in the sector are now having to address a rather different set of demands.
Trading conditions for the NRU sector have improved over the course of 2017. Prices have started to recover and many of the efficiency programs put in place when prices were low have started to pay dividends in terms of reduced operating costs and lower breakeven points1. From a corporate treasury viewpoint, some themes have persisted, while others have changed. For instance, M&A activity continues, so treasuries still ﬁnd themselves having to handle the consequences of asset acquisition/disposal in addition to their everyday workload. As a result, banks capable of shouldering some of this extra workload remain in demand.
Elsewhere, the pressure on working capital has somewhat abated, as companies have renewed revolving credit facilities and beneﬁted from their earlier cost cutting. Instead, a growing number of treasuries are looking for more efficient means of managing rising liquidity levels and improving the returns thereon.
Nevertheless, treasuries still remain focused on improving process efficiency and working capital, so next generation virtual accounts and the extension of supply chain ﬁnancing to smaller suppliers are attracting interest. Finally, new methods of tracing payments and Distributed Ledger Technology (DLT) are becoming more popular discussion points at treasury events and meetings.
Oil and gas
In contrast with 2016, oil prices in 2017 have presented a more optimistic picture2, with the latter half of the year seeing a steady recovery in Brent Crude. At the same time, there have been signs of demand also increasing.
On the capacity/inventory side, previously weak oil prices saw many exploration projects curtailed, which has resulted in a drop in production capacity, while inventory levels have also fallen. The OPEC supply reduction agreement and a similar non-OPEC agreement have also played a part in supporting a more positive price outlook.
This more positive environment is driving renewed interest in exploration. For example, oil and gas reform in Mexico with its new bidding rounds is attracting interest from oil and gas companies looking for new production sites. At the same time, the M&A activity that was so prominent over the past year still remains a theme. Shareholders are still seeking value, so companies are looking for projects that have stalled for possible acquisition.
In response to weaker oil prices, oil and gas companies made major efforts to improve productivity and efficiency. This has reduced the breakeven oil price for many companies in the sub-sector.
Power and utilities
The power and utility sub-sector has seen a marked shift towards increasing solar capacity as a result of the Paris Accord. This was one of the many themes we anticipated in our 2017 outlook that came to pass during the year and are likely to persist. Others include a more general expansion in renewables and the increasing popularity of electric cars. A factor here has been the realisation that the costs of producing electric vehicles may actually be considerably lower than previously assumed.
Metals and mining
The metals and mining sub-sector has been experiencing something of a shift in terms of energy mix too, with coal declining on environmental impact concerns. However, as mentioned above, electric cars seem likely to increase in popularity, which has positive demand implications for the metals used in their production: nickel, copper, cobalt and lithium. On the ﬂip side, as petrol car sales start to decline and give way to electric vehicles, this may have a major effect on demand for metals such as platinum and palladium used in catalytic converters.
The sub-sector is seeing a rise in the number of joint ventures being undertaken and there is still considerable M&A activity, with assets being sold as major players review which business are (or are not) core to their operations3.
The global chemical industry was severely impacted for a considerable period by the global economic crisis, but recently there have been some encouraging signs of prices recovering. The chemical industry has also seen considerable M&A activity recently, including a significant number of spin offs. Some of this has been defensive, while some has simply been part and parcel of reshaping enterprises to focus on core activities.