Looking ahead: Oil, Brexit and China ECONOMICS & RESEARCH ISTANBUL MAY 24, 2016 Dr. Cyrus de la Rubia
Looking ahead: Oil, Brexit and China
ECONOMICS & RESEARCH
ISTANBUL MAY 24, 2016
Dr. Cyrus de la Rubia
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►►► 1. State of the world economy
2. Oil: did we reach the bottom?
3. China: Repercussions of the slow down for the bulk market
4. Brexit: how big is the risk for the world economy?
5. Contact/Disclaimer
31.05.2016 Oil, Brexit and China 1
Agenda
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31.05.2016 2 Oil, Brexit and China
State of the world economy
GDP growth forecast 2016 according to HSH
Nordbank/IMF
Source: HSH Nordbank Economics & Research, IMF
31.05.2016 3 Oil, Brexit and China
State of the world economy
GDP growth forecast 2016 according to HSH
Nordbank/IMF
Source: HSH Nordbank Economics & Research, IMF
0.9
1.51.41.61.9 1.7 1.6
2014 2016 2018 2020
Euro area
7.3 6.9 6.5 6.2 6.0 5.8 5.3
2014 2016 2018 2020China
-0.1
1.0 1.0
0.3 0.5 0.5 0.5
2014 2016 2018 2020
Japan
1.3
0.0 0.0
1.52.1
2.6 3.0
2014 2016 2018 2020Latin America and
the Caribbean
6.2 6.15.2 5.1 4.9 4.8 4.7
2014 2016 2018 2020
Emerging Asia ex
China
3.42.8 3.1 3.6 3.8 4.0 4.1
2014 2016 2018 2020
Africa and Middle
East
2.4 2.4
2.0
2.42.2 2.2 2.2
2014 2016 2018 2020
USA
3.4 3.2 3.13.4 3.5 3.5 3.5
2014 2016 2018 2020
World
31.05.2016 4 Oil, Brexit and China
Commodity markets
Oil - up again?
Source: Common licence
31.05.2016 5 Oil, Brexit and China
Crude price (Arab light, USD/barrel) and industry metal prices (index)
Commodity markets
Did we reach the bottom?
Source: HSH Nordbank Economics & Research, Bloomberg
31.05.2016 6 Oil, Brexit and China
Commodity producers have cut their investment
activity in 2015 and may continue to do so this year
to protect their cash flow
Capital expenditures of iron ore
producers in mn USD
Source: HSH Nordbank Economics & Research, Bloomberg
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2008 2009 2010 2011 2012 2013 2014 2015
BHP Fortescue
Vale Total
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
20.000
10.000
60.000
110.000
160.000
210.000
260.000
310.000
360.000
2009 2011 2013 2015
Oil explorers, lhs Oil service providers, rhs
Capital expenditures of top 15
oil service providers and of top
15 oil explorers in mn USD
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2008 2009 2010 2011 2012 2013 2014 2015
USA China Europe Other
Capital expenditures of coal
producers in mn USD (top 3
producers of different regions)
31.05.2016 7 Oil, Brexit and China
So called cash costs of onshore oil production,
2015, USD/Barrel
Source: Economist, HSH Nordbank Economics & Research
Interpretation:
(1)Taking Brazil as an example, the chart states that on average Brazil‘s projects produce with a negative cash flow, if the oil price falls below 20 USD/barrel.
(2)Global onshore output amounts to 80 mn barrels/day. Projects with output of some 70 mn b/d produce with a positive cash flow as long as the oil price is above 20 USD/barrel.
(3)This means: If the oil price approaches the 20 USD-level, oil projects of 10 million barrels/day would drop out immediately.
(4)The bottom seems to be around of 30 to 35 USD/barrel
Commodity markets - crude
It seems like the market bottomed out
Commodity markets – what is going to happen in
Brazil?
31.05.2016 8 Oil, Brexit and China Source: HSH Nordbank Economics & Research, Bloomberg
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
Mar 01Mar 04Feb 07 Jan 10 Jan 13 Dec 15
GDP Brazil
Capital spending
GDP and capital spending, change
in comparison to year before, in %
Exchange rate (BRL/US-Dollar) Political mile stones
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
2001 2005 2008 2012 2016
May 2016: President Rousseff removed from office for up to 180 days
May 2016: Takeover by former vice president Temer
July 2016: First reforms are expected before the summer break. Otherwise it would be a sign of weakness.
Aug – Nov 2016: Rousseff will probably be removed from office permanently
Oct 2016: Municipal elections
Oct 2018: Presidential elections
Ongoing: Investigations into key policital players due to another corruption scandal
31.05.2016 9 Oil, Brexit and China
China
Risk for the world economy?
Source: FT
31.05.2016 10 Oil, Brexit and China
China
The well known problem of overcapacity
China
Three forces are under way: Less growth, increasing
significance of services and less trade intensity
31.05.2016 11 Oil, Brexit and China Source: HSH Nordbank Economics & Research, ADB
0
5
10
15
20
25
30
35
1990 1995 20002005 2010 2015
30
35
40
45
50
1990 2000 2010 2015
Value added in the industrial sector/GDP
Value added in the services sector/GDP
Industrial sector and services
sector in % of GDP
Imports in % of GDP Average yearly GDP change in %
0,0
2,0
4,0
6,0
8,0
10,0
12,0
62 -69
70 -79
80 -89
90 -00
00 -09
10 -15
16 -20
China‘s slowdown is felt mostly in coal imports, less
so in iron ore imports, while crude imports are
strong
31.05.2016 12 Oil, Brexit and China Source: HSH Nordbank Economics & Research, Bloomberg
Total, -22,6%
Austral., -21,6%
Indone.,-28,2%
Canada, -20,8%
0
50
100
150
200
250
Apr 2014 - Mar 2015
Apr 2015 - Mar 2016
Total, 10,3%
Saudi Arabia,
3,5%Iran, -4%
Russia, 34,6%
Venezu., 20,4%
Iraq, 13,4%
0
50
100
150
200
250
300
350
400
Apr 2014 - Mar 2015
Apr 2015 - Mar 2016
Total, 3,2%
Brazil, 18,9%
Austral., 6,7%
South Africa,
3,6%
0
200
400
600
800
1000
1200
Apr 2014 - Mar 2015
Apr 2015 - Mar 2016
China coal imports in 1000
metric tonnes
China iron ore imports in 1000
metric tonnes
China crude imports in 1000
metric tonnes
Significantly down
Moderately up
Strongly up
Brexit
What if?
31.05.2016 13 Oil, Brexit and China Source: FT
31.05.2016 14 Oil, Brexit and China
Starting point
• Polls show that a Brexit is a distinct possibility.
• Negotiations about the Brexit would be very tough for Britain as EU members as Germany and France are not interested making the leave option attractive.
Short term impact • Market turbulences are probable, especially in 2017 when negotiations might be stuck
without any compromise in sight. • EU and euro area may get into trouble, too, given the presidential elections in France in
April /June 2017. • A recession in UK and euro area is highly likely in 2017. • Real estate prices will go down significantly in London. Long term impact • Depending on election outcome in France and political changes in other countries the unity
of the EU could be in danger. • Growth potential of UK would be lower, depending on the final new institutional settings. • Growth potential of EU would suffer much less than UK‘s growth potential under the
condition that the rest of EU will remain stable. • London as a financial hub should survive, but parts of the business would be absorbed by
Frankfurt and Paris.
Brexit
What if?
Contact
Dr. Cyrus de la Rubia
Chief economist of HSH Nordbank
and Head of Research
Tel: +49 (0)40 3333 15260
HSH Nordbank AG
Gerhart-Hauptmann-Platz 50
20095 Hamburg
Germany
Oil, Brexit and China 15 31.05.2016
Disclaimer
The market information contained in this presentation is for informational purposes only. It can not substitute own market research or separate legal-, tax- and financial- advice and information. This presentation does not constitute an offer to buy or sell certain assets. HSH Nordbank AG points out that the herein published market information is only meant for investors with own economical experience, who are able to evaluate the risks and chances of the herein discussed market / markets and who are themselves able to conduct research through a variety of sources. The statements and data contained in this presentation are based on either thorough research by HSH Nordbank AG or on sources that are considered reliable but cannot be verified. HSH Nordbank AG regards the sources used as reliable but can not assess their reliability with absolute certainty. Single pieces of information could only be assessed regarding their plausibility; an assessment regarding their accuracy has not been made. Furthermore, this presentation contains estimates and predictions based upon numerous assumptions and subjective evaluations made by HSH Nordbank AG as well as outside sources. This information is only meant to provide non-binding perceptions of markets and products as of the time this presentation was issued. HSH Nordbank AG and its respective employees thoroughly conducted work on this presentation but can not guarantee completeness, actuality and accuracy of the provided information and predictions. This document may only be distributed in compliance with the legal regulations in the respective countries and persons obtaining possession of this document should inform themselves about and comply with the applicable local regulations. This document does not contain all material information needed for economic decisions and the information and predictions provided can vary from those made by other sources / market participants. HSH Nordbank AG as well as their organizational bodies and employees can not be held responsible for losses resulting from the use of this presentation, its contents or for losses which in any way are connected to this presentation. HSH Nordbank AG points out that it is not allowed to distribute this presentation or any of its contents to third parties. Damages to HSH Nordbank AG resulting from the unauthorised distribution of this presentation or any of its contents to third parties have to be compensated for by the distributor. The distributor has to keep HSH Nordbank AG free from all claims arising from the unauthorised distribution of this presentation or any of its contents to third parties and all legal cost in connection with those claims. This particularly applies to a distribution of this presentation to U.S. Persons or persons situated in United Kingdom. This is a marketing communication. The document has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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