Kim BENNI @ ComRisk 2016 - Implications of political risk on commodity markets

Implications of political risk on markets

Kim BENNIComRisk, 26th of May, London

• This document was prepared by Tereos (the “Company”) for the sole purpose of the “ComRisk 2016 conference” organized in London, May 2016.

• This document contains certain statements that are forward-looking. These statements refer in particular to the Company’s forecasts, its expansion of operations, projections, future events, trends or objectives which are naturally subject to risks and contingencies that may lead to actual results materially differing from those explicitly or implicitly included in these statements.

• The Company, as well as its affiliates, directors, advisors, employees and representatives, expressly disclaim any liability whatsoever for such forward-looking statements. The Company does not undertake to update or revise the forward-looking statements that may be presented in this document to reflect new information, future events or for any other reason and any opinion expressed in this presentation is subject to change without notice.

• This document does not constitute, or form part of, an offer or invitation to sell or purchase, or any solicitation of any offer to purchase or subscribe for, any securities of the Company in any jurisdiction whatsoever. This document shall not form the basis of, or be relied upon in connection with, any contract or commitment whatsoever.

• Please note that all percentages included in the following presentation may be calculated on non-rounded figures and therefore may vary from percentages calculated on rounded figures

Disclaimer

Tereos an unique profile of Cooperative Sugar Group

24,000EMPLOYEES

$5.0 Bn REVENUES

SUGARSugar

No.3 worldwide

Alcohol and ethanol

No.1 in Europe

Starch

No.3 in Europe

12,000COOPERATIVES

GROWERS

Tereos sites around the world

Brazil

China

India

Indonesia

Singapore

47 industrial sites and 6 trading offices in 14 countries

ASIA

LATIN AMERICA

KenyaMozambiqueRéunionTanzania

BelgiumCzech RepublicFrance ItalyRomaniaSpainSwitzerlandUnited Kingdom

EUROPE

AFRICAINDIAN OCEAN

Tereos Commodities

What are the impacts of political decisions on markets ?

“Hope is not a strategy” – Yogi Berra

But more important : how to actually minimize the impact ?

“He who knows when he can fight and when he cannot will be victorious” – Sun Tzu

2

• Import/Export taxes permitted under WTO

• Import/Export ban temporarily permitted under WTO

• Import/Export quota temporarily permitted under WTO

• Indirect restrictions GMO restrictions, long delays to get customs clearance, safety concerns

• Currency Shortage of hard currency to pay for imports (Venezuela), devaluation of Russian Ruble, Ukrainian Hryvnia, Brazilian Real

• Sanctions Cuban embargo, sanctions against Iran/Sudan/Myanmar

The political decisionmaker’s arsenalor the risk manager’s seven circles of hell

• XX

2010 Russian grain export ban

Impact of political decisions on markets

Early June : situation is (almost) normal

Early July : temperatures reaches 40°C+ Early August: crops are severely damaged

• Heat wave in Russia

• In a wildly anticipated move, Russian gov’t decided on 10th of August to put an export ban in place, which lasted for almost a year

Misleading official production statistics

Rally in price started way before the announcement

2010 Russian grain export ban


1-Jun

6-Jun

11-Ju

n

16-Ju

n

21-Ju

n

26-Ju

n1-J

ul6-J

ul

11-Ju

l

16-Ju

l

21-Ju

l

26-Ju

l

31-Ju

l

5-Aug

10-A

ug

15-A

ug

20-A

ug

25-A

ug

30-A

ug4-S

ep$150

$170

$190

$210

$230

$250

$270

$290

$310

FRENCH FOB Wheat US FOB WheatUKRAINE FOB Wheat RUSSIA FOB Wheat

• Build an independant & reliable market information network Boots on the ground : Local informants / partners / in the supply chain if possible,

lobbying in key political instances Eyes in the sky : Satellite imagery, production estimates

• Contract design Make as little as possible commitment to origin/destination to be able to ship to/from a

different location Include a « force majeure » clause covering impacting situation such at least war,

sanctions, major events, enforcable under clear international law Consider insurance on political risk At the very least have a limitation of responsability clause to some % of product value Have enough logistical flexibility to avoid demurrage charges and swiftly divert goods Use small logistical units, short payment terms

Export taxes, ban & informal restrictions

How to actually minimize the impact ?

Janu

ary-13

March-1

3

May-13

July-

13

Octobe

r-13

Decem

ber-1

3

Februa

ry-14

May-14

July-

14

Septem

ber-1

4

Decem

ber-1

4

Februa

ry-15

April-1

5

June

-15

Septem

ber-1

5

Novem

ber-1

5

Janu

ary-16

April-1

6$250

$300

$350

$400

$450

$500

$550

$0.22

$0.27

$0.32

$0.37

$0.42

$0.47

$0.52

$0.57

$0.62

Raw Sugar 12 months ahead in USD/MT Value of a Brazilian Real in US Dollars

Raw

Sug

ar

Real

• Brazil is the world #1 sugar producer and exporter

• Thus value of sugar in global markets is related to the value of the Brazilian Real

• Political and economical turmoil in Brazil is pressuring down the Réal

The world sugar market disconnected from the Réal

2015 Brazilian currency crisis


• Argentina is a major exporter of corn & soybean

• For an argentinian farmer, the price is negotiated in US Dollars according to world market value but paid in devaluating Pesos

Peso was pressured and traded on the black market

Farmers reduced selling and kept their production in silo bags as a « bank » account, creating export shortages

2013 Argentinian currency crisis


• Money has two functions : it is a measure of value and a medium of exchange. One can set a price in dollars but pay in Euros, gold coins or frozen fish.

• Denomination currency The most « natural » or stable currency for the pricing of the commodity, Often it is the currency of the marginal producer/consumer on the global export market

• GBP for cocoa, USD for sugar ?

• Payment currency The one that creates the least trouble for payment circuits Consider settlement of payables in alternate currency terms or bartering in a structured

manner

Currency devaluation


May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Nov-14

Feb-15

May-15

Aug-15

Nov-15

Feb-16

May-16

$200

$250

$300

$350

$400

$450

$500

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

China Corn Stock to Use in MonthsChina corn import parity including taxes in USD/MTDalian corn in USD/MT

• China gov’t used to buy corn directly from Chinese farmers to store it in « strategic reserves ». Since 2013 the domestic corn purchase price was well above world corn market import parity + taxesThis led to a huge inventory buildup that is now estimated to be over 6 months of consumption, bought at high prices

• In 2016, the China gov’t had to change its corn policy for price support to direct farmer supportThis is now going to lead to a sharp reduction of inventories and prices in China

2016 Chinese corn strategy change


Inventory buildup

• The European ETS for carbon is subject to substancial political influence to bring its price to ~30 € /T of CO² Phase I ended at zero price

give a surplus of quotas Phase II saw decreasing

prices as industrial production in Europe fell on the back of the global crisis

Phase III strongly limited the use of international carbon credits

2006-2016 Carbon quota


Feb-06

Aug-06

Feb-07

Jul-0

7

Jan-0

8Ju

l-08

Jan-0

9

Jun-0

9

Dec-09

Jun-1

0

Dec-10

May-11

Nov-11

May-12

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Mar-15

Sep-15

Mar-16

0 €

5 €

10 €

15 €

20 €

25 €

30 €

European carbon credit (EUA) International carbon credit (CER)

Phase I Phase II Phase III

• Actively monitor policies for gov’t of countries that matters for the commodity you are trading Local information network. Bloomberg & Reuters are usually 1 week late. World Trade Organization tool, based on customs codes, for change of duties Local customs for import/export duties

• Automate monitoring, issue warnings when change is over 2 sigmas Big data: price, volumes per country, destination, commodity Bloomberg & Reuters can help you very much doing this

• Pay special attention to : Countries barely self sufficient in the commodity, that may swing from export to import

Change in gov’t policies


• Actively monitor sanctions lists applicable to the commodities, countries and counterparties you deal with OFAC, EU, Local authorities Example : you’re a British group, your Swiss trading branch sells in US Dollars to clients in Iran

wheat procured from Ukraine

• Get a compliance information system and laywers to support you As penalties can be >100x the margin of the business !

• Pay special attention to : The currency used : using USD means the transaction is subject to US law, even if it never involves

US companies, persons or goods Logistics partners you use : ports, shipping companies, bunker fuel providers Services you provide beyond the goods : financing, access to future markets, logistics, insurance &

storage, FX operations. Potential military/restricted/smuggling use of the goods you trade

International sanctions


International sanctions


Banks may restrict

business in certain

countries

Company policy w.r.t image and

C.S.R

International law, sanctions

of OFAC, EU27, UN

Clients may require you

demonstrate compliance w.r.t child

labor, terrorism, …

• Manage stakeholders International bodies Banks Clients Company governance

Kim BENNI @ ComRisk 2016 - Implications of political risk on commodity markets

Data & Analytics

Transcript of Kim BENNI @ ComRisk 2016 - Implications of political risk on commodity markets