Private Finance Blog

The negative cycle of a downturn in commodities Commodities tend to move in waves of profitability, profitability leads to excess supply. Excess supply leads to lower prices and losses to the industry. Losses lead to contraction and closure of many factories and supply shrinks, this sows the seeds of the next upward wave in commodities. During a downturn, when the firms are in distress, factories maintain production. There is a cost in idling and restarting furnaces, a firm would choose to continue production despite heavy losses over the short term in the view to prevent losses occurring due to shutdown of furnaces. As supply does not go down even though the firms are in distress, additional supply enters the market at cheaper prices as producers chase cash over profits. Firms continue producing through losses because of restarting costs. Debt is another push factor for factories to continue to produce into losses. Producers have to chase cash, and oftentimes this means producing...

The structure of the oil supply industry. The supply of the oil industry can be divided into the conventional, unconventional oil supply Conventional being the typical land oil rig Unconventional being the offshore oil sector as well as the shale oil and other sources of oil. The first layer, or conventional oil, consists of the largest supply of oil in the world. There are many different types of oil fields. I cannot recall the distinction, however the large elephant oil fields, with over 30 billion barrels of oil reserves, were all discovered in the early 60's The elephant oil fields, or Oil requires constant investment in order to maintain stable production, larger production leads to higher depletion. Oil Capex has dropped off significantly since 2014 I read several years back that oil maintenance capex, or the cost to keep stable production due to the natural decline in oil production in 2015, was insufficient to produce the required oil to maintain constant...

Steel is an interesting space. Supply has contracted due to the slowdown in 2015-2016. There was a large slowdown and many companies went bust. The figures are somewhere, google is your best friend. In addition, China has a new policy called supply side reform. It's a huge cut, capacity cut has been more than Global capacity of steel is about 2000million tonnes. There have been shutdowns of 168million tonnes of BOF/EAF by the government, and another 110million tonnes of induction furnace. This means approximately 14% of global steel capacity has been shut down. I've borrowed CRU's graph below to illustrate the capacity changes in China. Steel prices are a function of utilization. The higher the utilization and the industry as a whole is able to commend higher prices as supply becomes tighter. In addition, a higher utilization translates to lower costs per tonne, as fixed costs are spread out over additional tonnage. Steel demand has continued growing in 2017...

A lot of oil rigs were constructed from the 70's till the 80's. The sharp drop in oil prices in 2015-2017 has led to day rates plummeting for offshore oil rigs. In addition, offshore oil rigs have been unable to find work and have been cold and warm stacked across the industry. Capex rates have fallen as oil prices have fallen. While it is not so noticeable on the graph above, Offshore projects approvals have started to improve. Although customer Capital Expenditures have not changed, the cost to execute an offshore project has been falling due to falling dayrates in the offshore space. Capex investment by the oil majors are still not moving, this is likely to change. Projects are profitable at 30 to 50 usd per barrel, substantially below current prices of 75-80 usd per barrel. Historically utilization of oil rigs have ramped up over a period of 1 and a half years. This ramping up can already be seen from late 2016 until early 2018 until today, however the ra...

Low cost moat A low cost moat is when a company has a cost of production that is significantly below the cost of production of its competitors. An example is a company able to produce a good at a cost of 5 compared to the average competitor which can only produce at a cost of 8. Low cost moats are the strongest competitive advantage in the commodities space, as there is no differentiation between different products. At an example would be bricks, sand, steel, coal. Where the product quality is standardized. A buyer would depend heavily on pricing in order to determine their purchasing decision. In an environment where the price of the commodity is high, the low cost producer is able to obtain outsized profits, and is able to grow at a faster pace than their competitors, provided that they maintain their cost advantage. In an environment where the price of the commodity is low, they are able to operate at a slight profit or expand market share while their competitors are struggling....

Low cost electricity power Bakun Dam Barum Dam and other dams Tropical region, a lot of captive hydropower key word is captive hydropower that is not being used for residential or commercial activities.  Hydropower is the cheapest form of power plants available. Not easily duplicable, Tropical regions and large rivers required, for much of hydropower production in the world is land locked. Samalaju port is adjacent to major sea  trade routes, easy access to industrial region. Displacing of higher cost indian producers, located close to the main ferrosilicon consumption regions. Total steel production in the world (1691 million tonnes) Japan (104.7 million tonnes) (3rd largest) Taiwan (23.1 million tonnes) (11th largest) China (831 million tonnes) (Largest steel producer in the world) South Korea (71 million tonnes) (6th largest) Black Arrows from Samalaju Red Arrow From China Ningxia region (Ferrosilicon producing region)  8500 kwh per tonne of ferrosi...