Home' Trinidad and Tobago Guardian : November 19th 2015 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 19 • 2015
The Henry Hub spot price for
natural gas fell below US$2
per mmbtu on October 30, its
lowest level since April 2012.
Prices have recovered slightly
over the past two weeks but
US$2.25-2.35 is still well below the figure in
our national budget. Brent Crude has
approached the US$40 mark and is also below
our budgeted figure of US$45.
In his budget presentation the Minister of
Finance, Colm Imbert, pointed out that T&T
has options outside of the Henry Hub price
and can sell to Asian markets at higher prices.
Those prices were benchmarked at US$8 per
The prices of energy commodities across
the board are challenged and, in fact, hard
commodities as a whole are in a difficult place
at this time.
The Bloomberg Commodity Spot index---
which tracks the value of 22 raw materials---
is approaching levels last seen during the
global financial crisis of 2008-09. For a brief
moment in August the index was at similar
levels and the current retest of those lows is
coming on the back of a weaker outlook for
global growth in 2016, which will negatively
The suggestions by the US Federal Reserve
of a likely interest rate hike in December is
the emerging catalyst for this latest tantrum
in the commodities market and it is, of course,
spilling over into the global stock markets.
The issue of the US Fed and interest rates
was discussed last week under the headline
"Lower for Longer". That headline sums up
the matter but the interplay between interest
rates, currency and commodities still requires
Currently, there are three major central
banks in the world at different stages in terms
of policy action. The US is on the verge of
raising rates due to a positive economic out-
look. Japan is in the middle of an easing cycle,
and then Europe has just begun its ultra
accommodative policy stance.
If the US Fed were to raise short-term rates
it means that, relative to other countries, they
would be tightening monetary policy while
others will be easing. Currency pairs are set
to move in anticipation and the US dollar is
likely to strengthen further. A stronger dollar
is generally negative for commodity prices.
Negative interest rates are now a feature of
the second largest capital block in the world---
Further, easing by the European Central
Bank will push the money flow into US dollars
causing it to strengthen. That money flow
will find its way along the US yield curve
causing it to flatten. Potentially, even though
the US may be raising rates, it is very possible
for the benchmark 10-year US treasury to
remain in the 2.25 per cent region or go lower.
As the US Fed tightens the first order effect
is obviously the US short-term interest rate.
The second order effect is the exchange rate
and the long-term interest rate. This second
order effect will impact the emerging markets,
as their currencies will appreciate against the
US dollar as well. Potentially the ability to
service debt denominated in US dollars will
become challenged as the US dollar continues
Such a move can be defended to the extent
that the emerging market countries holds
currency reserves but this has its limits. For
areas of strain there will be a flight to quality
where capital leaves these weaker areas osten-
sibly moving to the US further keeping US
yields in check.
Challenges in servicing debt and lack of
access to new funding were a catalyst for the
US housing crash in 2007/8. The same chal-
lenges are on the horizon in the emerging
While not necessarily predicting a collapse,
the propensity for private debt to be transferred
to the public purse is real. One only needs to
look at our CL Financial debacle to understand
how easily and how suddenly this can occur.
The knock-on effect is just as was the case
in T&T since 2009, in that economic growth
slows down in the emerging market space
due to the financial struggles.
Most of the marginal demand on a global
scale will come from the emerging markets.
If they slowdown---and especially if that slow
down takes place in Asia---there will be a
sharp decline in demand for commodities.
That is what the markets are currently pricing.
The implications for T&T of a stronger US
dollar and weaker global demand are signif-
icant. It is not just the price decline and it
is not just about oil and gas. Demand can fall
but prices can stabilise and even rise if supply
comes into balance. Going forward, this is
where the real problem exists.
T&T built out quite a successful model in
the 1990s of industrialisation via natural gas
that has been called the "Point Lisas Model".
It worked well but unless we understand why
it worked well, attempts to replicate that
model in today s environment will be fraught
History will record that the 1990s was the
period when debt-fuelled economic growth
really took off. The ability to finance con-
sumption via debt increased demand expo-
nentially and this demand dynamic was aug-
mented further as the US Federal Reserve,
the global Central Bank, consistently cut rates
across economic cycles so that servicing incre-
mental debt remained affordable over time.
In 1981, yield on the 10-year US treasury
was close to 15 per cent. We are currently just
off the historic lows of 1.5 per cent. Into the
decade of the 1990s, rates went below 10 per
cent for the first time since the mid 1970s.
It is around this time that the price of iron
ore started a move from US$20-25 per tonne
to US$140 per tonne prior to 2008.
Then, during the period 20011 to 2013 where
China s consumption of cement exceeded the
total used by the US during the 20th century,
prices went further to US$180 per tonne.
The same price dynamic has occurred with
copper and crude oil. In terms of natural gas
prior to financial crisis, it was possible to get
US$21 per mmbtu in the Asian markets.
Since 2007/8 it should be apparent that
globally we are approaching limits on the
capacity to fuel growth through the expansion
of debt. While debt levels have grown expo-
nentially since the financial crisis, economic
growth has been tepid and well below what
is expected in a post-recession scenario.
The problem is that cheap debt fuelled an
unsustainable demand which, in turn, fuelled
an expansion of supply that was, itself, funded
There now exists a global oversupply in
most major industrial commodities including
oil and natural gas. Despite the oversupply
and over capacity most producers have to
keep the tap flowing in order to generate cash
flow to service existing debts.
This is creating a destabilising downward
price cycle. These issues, as it relates to oil,
are better understood than natural gas. Due
to market imperfections, in the main expor-
tation and distribution constraints, there are
divergent prices for the commodity across
the globe. Increased supply to Asian markets,
coming out of Australia, and improved logistics
will cause these dynamics to change over the
Prices in Asia are likely to go lower and
prices in the US are unlikely to rise signif-
icantly. Soft prices and surplus supply will
keep capital expenditure in check. Combined,
these two factors will pose challenges for T&T
where a ramped up exploration programme
is required in the long term and higher prices
almost a necessity in the short term.
Additionally, the prevalence of natural gas
means that our "industrial estate" concept is
no longer unique. Lower levels of economic
growth also means reduced demand growth
for commodities that are produced within an
industrial complex such as Point Lisas.
Let me be clear, I am not referencing a sce-
nario where prices collapses, demand collapses,
exploration collapses and products that we
have traditionally produced in an "industrial
estate" setting no longer becomes viable.
What I am pointing out is that replicating
the success of the 1990s is going to be much
more difficult from here going forward.
The global natural gas glut is likely to take
at least five years to sort out and bring demand
and supply into greater balance. In the mean
time we are tasked with the challenge of diver-
sifying our economy amid persistently low
oil and gas prices. We are also tasked with
increasing exploration and production when
from the perspective of the multinationals
operating in T&T there is little need to do so.
There is likely to be no quick fix to our gas
Ian Narine can be contacted via email at
Links Archive November 18th 2015 November 20th 2015 Navigation Previous Page Next Page