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
Impact of political decisions on markets
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
Impact of political decisions on markets
• 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
Impact of political decisions on markets
• 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
How to actually minimize the impact ?
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
Impact of political decisions on markets
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
Impact of political decisions on markets
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
Nov-12
Apr-13
Oct-13
Apr-14
Oct-14
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
How to actually minimize the impact ?
• 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
How to actually minimize the impact ?
International sanctions
How to actually minimize the impact ?
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