- David Andrada
- Global Sector Head – Natural Resources & Utilities, Global Liquidity and Cash Management, HSBC
By David Andrada, Global Sector Head, Natural Resources & Utilities – Global Liquidity & Cash Management, HSBC
After a challenging period of lower prices, things are looking far more positive for the NRU Sector. As David Andrada, Global Sector Head, Natural Resources & Utilities – Global Liquidity & Cash Management at HSBC explains, this means that treasuries in the sector are now having to address a rather different set of demands.
Trading conditions for the NRU sector have improved over the course of 2017. Prices have started to recover and many of the efficiency programs put in place when prices were low have started to pay dividends in terms of reduced operating costs and lower breakeven points1. From a corporate treasury viewpoint, some themes have persisted, while others have changed. For instance, M&A activity continues, so treasuries still find themselves having to handle the consequences of asset acquisition/disposal in addition to their everyday workload. As a result, banks capable of shouldering some of this extra workload remain in demand.
Elsewhere, the pressure on working capital has somewhat abated, as companies have renewed revolving credit facilities and benefited from their earlier cost cutting. Instead, a growing number of treasuries are looking for more efficient means of managing rising liquidity levels and improving the returns thereon.
Nevertheless, treasuries still remain focused on improving process efficiency and working capital, so next generation virtual accounts and the extension of supply chain financing to smaller suppliers are attracting interest. Finally, new methods of tracing payments and Distributed Ledger Technology (DLT) are becoming more popular discussion points at treasury events and meetings.
Sub-Sector Themes
Oil and gas
In contrast with 2016, oil prices in 2017 have presented a more optimistic picture2, with the latter half of the year seeing a steady recovery in Brent Crude. At the same time, there have been signs of demand also increasing.
On the capacity/inventory side, previously weak oil prices saw many exploration projects curtailed, which has resulted in a drop in production capacity, while inventory levels have also fallen. The OPEC supply reduction agreement and a similar non-OPEC agreement have also played a part in supporting a more positive price outlook.
This more positive environment is driving renewed interest in exploration. For example, oil and gas reform in Mexico with its new bidding rounds is attracting interest from oil and gas companies looking for new production sites. At the same time, the M&A activity that was so prominent over the past year still remains a theme. Shareholders are still seeking value, so companies are looking for projects that have stalled for possible acquisition.
In response to weaker oil prices, oil and gas companies made major efforts to improve productivity and efficiency. This has reduced the breakeven oil price for many companies in the sub-sector.
Power and utilities
The power and utility sub-sector has seen a marked shift towards increasing solar capacity as a result of the Paris Accord. This was one of the many themes we anticipated in our 2017 outlook that came to pass during the year and are likely to persist. Others include a more general expansion in renewables and the increasing popularity of electric cars. A factor here has been the realisation that the costs of producing electric vehicles may actually be considerably lower than previously assumed.
Metals and mining
The metals and mining sub-sector has been experiencing something of a shift in terms of energy mix too, with coal declining on environmental impact concerns. However, as mentioned above, electric cars seem likely to increase in popularity, which has positive demand implications for the metals used in their production: nickel, copper, cobalt and lithium. On the flip side, as petrol car sales start to decline and give way to electric vehicles, this may have a major effect on demand for metals such as platinum and palladium used in catalytic converters.
The sub-sector is seeing a rise in the number of joint ventures being undertaken and there is still considerable M&A activity, with assets being sold as major players review which business are (or are not) core to their operations3.
Chemicals
The global chemical industry was severely impacted for a considerable period by the global economic crisis, but recently there have been some encouraging signs of prices recovering. The chemical industry has also seen considerable M&A activity recently, including a significant number of spin offs. Some of this has been defensive, while some has simply been part and parcel of reshaping enterprises to focus on core activities.
1 https://oilprice.com/Energy/Oil-Prices/Why-Breakeven-Prices-Are-Plunging-Across-The-Oil-Industry.html
2 https://www.bloomberg.com/quote/CO1:COM
3 https://uk.reuters.com/article/uk-m-a-mining-2017-analysis/coal-dwarfs-battery-metals-in-mining-deals-despite-war-on-pollution-idUKKBN1EU1M2
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Treasury Themes
Liquidity
Many companies in the NRU sector have now renewed their revolving credit facilities and syndicated books, so their liquidity positions and balance sheets are far stronger than previously. Coupling this with the lower breakeven points delivered by recent corporate efficiency programs means that a growing number of treasuries in the sector are having to turn their attention to maximising returns on surplus USD liquidity in a rising interest rate environment.
Some companies have seen their liquidity levels rising to the extent that they are running up against the maximum counterparty limits in their corporate investment policy. Typically this is slightly less of an issue where the bank concerned has a strong credit rating, as it will probably also have a higher counterparty limit.
Nevertheless, there is still a need for solutions that can facilitate the placement of liquidity that exceeds the total that can be placed on deposit with the company’s banks. For instance, HSBC offers its Liquidity Investment Solutions (LIS), which offer an automated investment sweep so treasury clients can easily move surplus cash into a range of money market funds in accordance with their investment policy. This gives treasuries an operationally efficient way to set pre-defined investment parameters in order to meet their liquidity management objectives, but because the liquidity is placed with approved third party managers, it does not affect any counterparty limit the bank may have for HSBC.
Next generation virtual accounts
The high level of M&A activity across the NRU sector is resulting in the creation of many new entities. These new entities need bank accounts, but given the time-pressured nature of M&A, a common strategy is just to ‘lift and shift’, which typically doesn’t result in the optimum structure for liquidity management. This is a situation where the Next Generation Virtual Account (ngVA) can help. In addition to their traditional use for improving accounts receivable reconciliation, the latest incarnation of virtual accounts as ngVAs also offers a considerable degree of self service. This enables treasuries to open / close virtual accounts as required on the fly, which opens the door to highly flexible liquidity structures. In addition, ngVAs can be used to deliver capabilities such as payments and receivables on behalf of (POBO/ROBO) and in house banking.
Working capital
Although the NRU sector is less pressured on the working capital front than before, any opportunities to enhance days payable outstanding (DPO) without harming supplier relationships are still welcome. Many NRU companies have a large number of suppliers (especially metals and mining companies) so the new concept of a corporate card ‘aggregator model’ is therefore attractive.
Many smaller suppliers to these companies cannot justify the costs of being merchant acquirers for card payments in their own right. Under an aggregator model recently set up
for buyers/suppliers by HSBC in Australia and Singapore, they don’t need to be, but they can still receive card payments from larger customers.
Key to this solution is a large specialist merchant acquirer who acts as intermediary aggregator of buyer payments made by virtual card to their smaller suppliers. Any payments received by the aggregator are automatically sent by electronic bank transfer to the appropriate suppliers’ bank accounts.
The virtual cards have the usual credit terms, so buyers can benefit from up to ~55 days of interest free credit, thus improving their DPO. As a result, they may be motivated to pay supplier invoices via this method more quickly than if paying suppliers directly from their bank account. If so, the supplier also benefits from a reduction in their days sales outstanding
(DSO). Interestingly, the aggregator model is now being used to settle even high value invoices for services such as plant/equipment hire, which is a common expense for oil and gas or mining and metals companies.
Developing treasury expertise
One of the most striking changes across the NRU sector recently has been the emergence of new multinationals, especially in oil and gas. Some national oil companies that have hitherto operated mostly just domestically are looking to diversify their activities and expand their geographic footprint, so are seeking to develop partnerships and joint ventures to facilitate this.
These companies’ treasuries are not typically as sophisticated as the current oil majors’ treasuries. In many cases they will still have a significant number of paper processes and their financial functions will still be relatively decentralised, even within their country. Therefore, they are looking to their banks to help them make the transition to a globally centralised treasury as they expand into unfamiliar regions around the globe. In this scenario, a bank that can offer a global physical network, long experience of treasury centralisation and certified enterprise resource planning (ERP), treasury management system (TMS) and Swift experts can be of considerable assistance.
Growing interest: instant payments and DLT
In common with other sectors, there is considerable interest among NRU sector treasuries in instant payments and blockchain. The speed of instant payment systems and their ability to carry rich information within the payment message are obviously attractive. The slight caveat at present for treasuries is that several jurisdictions are currently restricting the use of their instant payment systems to relatively low value payments.
A further related opportunity is SWIFT’s global payment innovation (gpi), which provides the ability (among others) of tracking payments globally after they are made. This has the potential to transform the resource-intensive and inefficient manual payment tracking methods currently used into a low cost, low touch automated activity. Similar advantages apply to electronic trade transactions. For instance, electronic letters of credit (LC) can cut trade settlement times from ~15 days to just one day4.
Another innovation attracting considerable interest (but as yet little activity) among NRU treasuries is DLT, which involves sharing a transaction ledger across all participants on a network. This collaborative methodology makes it possible for all elements in a complete business processes to be carried via a single medium. Among many other financial activities, this could be used for streamlining cross border payments. The SBI Ripple Asia Venture is a practical example of this, with Japanese and South Korean Banks already testing blockchain-based virtual fund transfers using Ripple5.
Conclusion
From a treasury perspective, the environment for the NRU sector is no less challenging than last year. Some of the challenges, such as managing the consequences of M&A activity, remain the same. However, others have been replaced with tasks such as optimising / automating the efficient management of excess liquidity and improving DPO through the use of card payment aggregators. Elsewhere, newly-emerging multinationals are trying to maximise their financial control of new entities through treasury centralisation.
A common theme across all these tasks is the way in which they can become far less onerous to manage when assisted by a bank with sufficiently broad capabilities. These range from the core basics, such as an extensive physical network, to active participation in cutting edge digital initiatives, to providing deep niche expertise and bespoke solutions.
4 https://www.gtreview.com/news/asia/hsbc-and-reliance-in-indian-digital-first/
5 https://dowbit.com/asian-banking-tests-ripple-blockchain-fund-transfers/
