Sustainability can start affecting new age businesses - like fossil fuel businesses

Preamble

New age businesses like renewable energy, electric vehicles, social media technology giants, etc. are the talk of the world with their businesses attracting very high valuations.

These new businesses are expected to usher in a new business models attarcting high valuations. However, these business might start facing different type of sustainability issues in the days to come very similar to the issues faced by traditional fossil fuel firms

In this article, I explore some issues and trends relating to sustainability for these new age business.

Invite critical views

Main Article

A few weeks back I was attending an online webinar on Electric Vehicles and got connected with a retired gentleman who had worked in the automobile industry in his entire career. When I quizzed him about his views on the advent of electric vehicles and especially on its effect on climate change, he said he wasn’t sure! I was perplexed. After all, EV`s were supposed to be the panacea for the pollution that we all face from normal combustion vehicle engine car!!!

He told me a story. When cars were first introduced more than a century back, they were actually solving a pollution problem!! Before cars, horse carts were used by people to travel, in which the biggest issue was the cleaning and disposal of horse dung! Hence when combustion vehicles cars were introduced, people were happy that the dung problem will be a thing of the past. Now when the world is talking about solving climate change issues by replacing fuel powered cars with electric vehicles, he said he wasn’t sure of the downside effects of the EV`s !!

Recent sustainability concerns with new age businesses

The above story made to think about some of the sticky events across the world involving the new age businesses – especially the global digital technology giants.

• Recently, the famous Chinese company, Alibaba was fined $2.8bn by the Chinese government as the Chinese government wasn’t happy with the monopolistic tendencies wielded by Alibaba`s digital reach!

 

• China recently introduced a Personal Information Protection Law (PIPL) that lays down a comprehensive set of rules around data collection and protection. Along with a new antitrust law, the data protection law is seen as part of a broader effort by Beijing to rein in the power of its technology giants such as Alibaba and Tencent and creating a regulatory model for the next-generation internet.

• European Union (EU) introduced the General Data Protection Regulation (GDPR) in 2018 to regulate citizen`s data collection and privacy concerns. Many of the EU countries have also implemented a digital tax levy on digital services at point of consumption which has added to the controls on the global digital firms.

• Closer home in India, the Indian government recently had a faceoff with Twitter over blocking some accounts associated with the farmers protest. Twitter had to take some quick action to avoid facing a total blockage by the Indian government.

 

• Google and the Australian government have had a tiff on whether news on Google feed needs to be paid for by Google or not. It was resolved only after Google acceding to the Aussie governments concerns.

 

• USA law makers are so highly concerned about the power wielded by the technology giants like Google and Facebook, that they are talking about breaking up the companies like the telecom major AT&T many years back. Regular Congress sessions, in which the digital technology majors CEO`s are grilled, give an insight into the seriousness with which the USA government is looking warily at the influence of these companies over the general public.

 

• Cobalt and Lithium, which are the essentials to make batteries for Electric Vehicles’ face mining labor issues especially in Africa which can constrict the supply of these products in the days to come.

All the events described above, might be seen as discrete events in a common man`s eyes but the common thread is that all the new age businesses will very soon face a sustainability wall block very similar that the fossil fuels businesses have faced. The movie “The Social Dilemma” portrayed how the digital companies use algorithms to manipulate the general public`s thoughts and purchasing decisions.

Oil and Gas companies were global economic stars till sustainability backlash...

Oil and gas propelled the growth of global economy in the second half of 1900`s with geopolitics too affected by oil business dynamics. Downstream products of oil like fuels and plastics gave a boost to industries like automobiles, heavy machinery, and consumer products. However, soon these businesses were accused of being primarily responsible for the various society ills like global warming, climate change, oceans pollution, emissions, etc. Importantly capital markets too have been highly influenced by these trends with markets according higher valuations to firms with better compliance to environmental norms.

Backlash has been higher in Europe as compared to the USA, till last year which has forced European oil and gas firms like BP, Eni, Total, etc. to announce aggressive zero carbon target dates and move to renewables. In fact a leading company like BP sold of its prized chemical business assets in 2020 in order to be seen as a “green” and “environmentally compliant” company.

New age companies have phenomenal valuations Vs traditional firms…

Comparison of valuations of new age firms like Tesla, Google and Exxon over the last 10 years shows that new age firms have far greater valuations with the key reasons being - wider geographical reach and highly scalable, asset light models.

 What lies ahead?

With the recent sustainability backlashes facing the new age firms, will this run of higher valuations continue? Will there be roadblocks like what the oil and gas firms faced? Will capital markets start reducing the future cash flows as business model scalability becomes a question mark?

Interesting times ahead.

Corona Virus: “Thinking the Unthinkable” event

When I wrote my last blog “ Thinking the Unthinkable - A new world beckons us” ( https://ramnarayanan1112.blogspot.com/2020/01/thinking-unthinkable-new-world-beckons.html )little did I ever think that the prophecy of the thought would be proved true very soon with the present global crisis due to the Coronavirus.

To refresh the memories, the authors of the book and the driving forces behind the thought, Nik Gowing and Chris Langdon propound the thought that the world is becoming more and more volatile. Very aptly, rather the normal black swan events, Nik and Chris talk about black Jellyfish events- which lurk in the sidelines without catching anybody`s attention and explode suddenly. The Coronavirus has indeed proved to be a black jellyfish event!!!

Two of the main reasons that impede a proper response to these black jellyfish events, as per the authors, are the inabilities of present-day leadership to handle such events. Its mainly attributed to the lack of proper tools and frameworks to pro-actively address these events effectively. On top of these, I would that egos and silo minded thinking of the present-day leaderships have added to the woes in fighting the virus attack.

Events of last 2 months – leadership failures - China, Saudi, USA, Russia, Europe

China started facing the first signs of the deadly coronavirus in December `19 itself but refused to accept the seriousness of the issue and kept it under wraps. Only when the Chinese were faced with a huge number of cases, which could have got blown to huge proportions during the Lunar New year movements, did the Chinese government swing into action. The damage was already done within China and one can only guess whether the numbers and facts that are still emanating from China are completely true!! The Chinese didn’t allow WHO officials to enter China till late February`20, which had they allowed earlier, could have helped the WHO sound off the other governments about the seriousness of the Corona Virus.

The response of the developed western nations too proved inadequate and adds credence to the “Thinking the Unthinkable” theory. The USA president, Donald Trump shouted loud in late February`20 that the USA will not be affected much, and his government is in control of the situation. A month later, the US has had the highest number of virus cases and the government is short of medical supplies.  Trump is at odds many times with one of his top medical advisors Dr. Fauci. Trump, facing an election this year, has put economic agenda ahead of health agenda by not declaring a total lockdown and wants the country`s businesses to start off in full steam by Easter in mid -April. Does he any evidence that the virus will die off by then? Guess not and certainly, Dr.Fauci doesn’t believe so!!!

The Italians and the Spaniards, despite the huge movement of people from China, didn’t take any preventive actions and had to pay the price with the highest fatality rates. The European Union too didn’t come to their rescue, at the most needed time, indicating frictions within the Union. Left to fend for themselves, these countries had to announce a lockdown and take their own actions. Leadership woes in the EU!!!

The financial markets rout was led by the collapse in the oil prices thanks to the ego hassles between the Saudis and Russians and the US. Each wants to kill off the others` oil-linked businesses. The USA needs its shale oil producers to survive and be less dependent on the Middle East for oil, while the Saudis and Russians want to crush the US shale oil business. To support the oil prices post the virus outbreak, the Saudis approached Russia to cut oil production but was rebuffed by the Russians. Due to the poor political relations between the US and Russia at present, the Russians wanted low oil prices to hurt the US shale oil business.

However, both the Russians and Saudis need oil prices to be above $60/bbl to sustain their social spending costs. If no truce is attained on the oil wars, social spending will be cut in Saudi and Russia, which will lead to more suffering for their people while the decline in the US shale oil business will lead to more job losses. Politicians and leaders fight while people suffer!!

Will the leaders arise out of parochial thought process??

I am pretty sure that the global economic and geopolitical scenario will undergo many changes once the world recovers from this pandemic, very similar to the post-world wars scenarios. However, the challenges will be different this time, especially for the political and business leaders, who will face some tough but pertinent questions:

Ø  Will China be the enemy in this war and made to atone like Germany?

With the devil`s advocate theory, that China has fabricated this virus to weaken other countries be proved?  Many leaders have made indirect references to China as the culprit. Unlike Germany which was the aggressor in the world war, China can always claim that it too was affected and has helped in other countries' efforts to fight the virus. China is an economic powerhouse now and is back on its feet now as other countries struggle. Countries will find it hard to ignore China.

Ø  Will firms with high dependence on Chinese supply chains develop a “China de-risking strategy”?

This is a big topic of discussion especially in pharma and automobile companies which have been badly hit. I sincerely hope that firms, as a part of their de-risking strategy, do a “China derisking “activity. No other country today can offer the manufacturing base as China and hence the global firms` movement on this aspect will be slow. Business leaders, with a focus on business recovery and short-term results, will need to take tough decisions in the next 1-2 years to move away from China.

Ø  Will Donald Trump and focus on health rather than the economy?

Trump was planning to run his re election campaign on a booming economy that has been adversely affected now. Will he focus more on getting the virus under control rather than the economy? Will the US people vote now for a socialist-leaning candidate in this election who will focus on health spending?

Ø  Some other pertinent questions that global leaders will face now:

·         Will governments focus more on health infrastructure to help fight pandemics in the future?

·         Will countries like Italy, who had signed up for China`s BRI initiative, give it up now?

·         Will the Indian government move fast and bring in structural reforms to seize this opportunity and make an India as a better alternative to China for manufacturing?

·         Will countries like Japan and Taiwan who have handled the crisis very well be looked up for healthcare systems?

·         Finally, how will the global leaders come together to address the costs of this pandemic especially the lockdowns? Like the UN, which was established after the World War -2 to establish world order- will the IMF and World Bank`s roles are enhanced?

To conclude, global leaders have a tall task now once they recover from the virus. New political and economic orders will have to be established now. New frameworks will need to be developed to tackle the situation which is futuristic as well as sustainable.

“Thinking the Unthinkable” prophecy has been proved right with Coronavirus attack. Hopefully, leaders will be able to address the right issues with the right frameworks keeping their partisan interests aside!!!

Till then Stay healthy, stay safe!!

China`s oil diplomacy moves to bolster its super power status

China, the world`s largest oil importer, announced recently that it will set up a crude oil futures exchange which will be functional by late March`18. The contracts will be traded in the Chinese local currency Yuan and seeks to establish the Chinese oil futures exchange as a challenge to the traditional oil benchmarks like Brent and Dubai crude and the US benchmark WTI.

China has surpassed the USA in the recent past as the highest oil importing country globally with its 2017 imports of 8.4mn bpd surpassing the US imports at 7.9 mn bpd. The key reasons for China moving to the dominant position in the global oil trade are:

a) Oil demand growing at 11-13% fuelled by its GDP growth at around 7.5% annually.

b) Build up its strategic oil reserves across the country as a buffer against oil price fluctuations

c)Surging shale oil production in USA which has led to reduced imports into USA.

Over the last 15-20 years, the global commodities markets has been driven to  large extent by the Chinese demand due to its explosive GDP growth which in turn fuelled China`s energy demand and infrastructure growth. Apart from oil, other base commodities like iron ore, copper concentrates, bauxite and coal have seen very high demand rates and increased imports into China. 

Futures Exchanges in China

In order to have a relevant pricing mechanism, 4 futures exchanges are functional in China under the tutelage of China Securities Regulatory Commission (CSRC) out of which 3 exchanges deal with commodities and 1 exchange in financial futures. The exchanges are:

1.Zhengzhou Commodity Exchange (ZCE, 1993) – trades in agricultural commodities and PTA.

2. Dalian Commodity Exchange (DCE 1993) – trades in agricultural products and industrial products like PP, LLDPE, iron ore, etc.

3. Shanghai Futures Exchange (SHFE, 1999) -  trades in ferrous, nonferrous and precious metals, chemicals and energy products

4. China Financial Futures Exchange (CFFEX, 2006) – treasury bonds, options and futures.

In the last 5 years, China has witnessed substantial increase in volumes being traded on its exchanges. As reported by the China Futures Association, the turnover of futures contracts has doubled from nearly $15 bn in 2011 to nearly $30 bn in 2016.

Objectives for the oil exchange

The stated objective, for the new oil futures exchange, is to set a regional oil price benchmark as China is the largest oil importer globally. However these moves by China will have to be seen from the perspective of China`s ambition to become a global superpower. Like the US in the 20^th century and Great Britain in the 18^th and 19^th century, one of the steps that China is taking towards its path of superpower status is to control the global trade flows.

China`s global ambitions for a superpower status

As per WTO 2016 figures, China controls 13% of the global trade exports and 10% of global trade imports. With its plans for OBOR, which aims to link China to all major nations China aspires to be trade centre of the world very similar to the old days when the silk route trade was one of the dominant trade routes of the world. In the last few years China has made strategic investments in many parts of the world like in Africa and to support its trade flows, it has bolstered its defence presence in key ports in Pakistan, Sri Lanka, etc.

To support the Chinese trade patterns, China also aspires to make the local currency - Yuan to be a global currency and pose a challenge to the US dollar as a global currency. Since 2016, the Yuan is one of the 5 currencies in Special Drawing Rights (SDR) of the International Monetary Fund (IMF) with a 10% weightage. With trade in Yuan. Thus starting an oil exchange in Yuan, China can increase its stake in the global trade flow as the Brent and West Texas Intermediate are dollar denominated exchanges.

Challenges for the proposed oil exchange

On the other side some of the challenges that the Chinese oil exchange would face are:

·  The Yuan has faced many issues of being manipulated by the Chinese government and hence a big question exists over the currency`s movements. Hence many global players will be skeptical pf playing in a Yuan denominated contract given the forex risks and convertibility issues of the currency.

·  Normally, all the oil benchmarks (Brent, WTI and Dubai) are based in a production center and not in a demand center. Hence the liquidity of the trade in the new exchange can be hampered.

·   Since China is a demand center, freight plays an important role in the pricing and hence freight cost effect in the pricing will be unclear. It can be argued that the London Metal Exchange (LME) is based in London when hardly any metal production occurs in the United Kingdom. However, London being one of the major financial centres of the world coupled with the fact that the LME has physical warehouses in many parts of the world helped LME in becoming the global benchmark for metals trade.

Thus China`s move to setup an oil futures exchange is not only control oil pricing but also in tune with China`s global superpower ambitions of becoming a powerhouse like the USA after WW-2 and Great Britain after the Industrial Revolution. Despite challenges, China has time and again proved that it can move against all odds and succeed. Whether the new oil futures exchange will be a success or not – only time will tell!