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The Rise of the Fintech Robots

The Rise of the Fintech Robots

Financial tech, often abbreviated as Fintech, is a rising economic industry that has seen companies making the move to a reliance on new age technologies that make financial systems more reliable and efficient.

One of the latest manifestations of the Fintech craze is the advent of “robo-advisors” – automated financial platforms that seek to replace the traditional advisors. These systems use advanced algorithms to provide users with financial advice and investment portfolios, a service that some believe is threatening the existence of human wealth managers.

Proponents of these new Fintech advisors can point to a multitude of reasons why this shift has occurred. According to Fintech Business, robo-advising software is typically far more accessible to customers with lesser assets. Traditional advisors typically set higher minimums.

In addition to the accessibility, automated financial advisement services are more affordable than their human alternatives. Customers will likely be offered a free trial period, and will look to pay 0.25 percent to one percent of AUM (assets under management), Fintech Business reports. By contrast, classic advisors charge one to three percent of AUM.

Perhaps the most notable advantage of robo-advisors is its appeal to a younger generation of investors. To the current “millennial generation,” who grew in the digital era of ATMs and smartphones, the appeal of this new analytical software is undeniable. A person-to-person interaction may be sacrificed in lieu of the convenience of 24/7 web and mobile app access.

Millennials are also characterized as being more distrustful of financial institutions when compared to older generations. Given the recent economic crisis among other contributing factors, younger people simply don’t trust in traditional wealth managers. They value the transparency of the automated services.

It isn’t just limited to the younger generation. According to the New York Times, robo-advising company Betterment “realized that 20 percent of its assets were from customers over the age of 50.” Apparently the service appealed to seniors who sought advice on how to withdraw their retirement money. In response, Betterment developed a service that catered to them specifically.

Despite the success of these robo-advisors, not everyone believes this spells doom for the classic wealth manager. According to a column by Chance Barnett of Forbes, younger people still value the personal interaction of a traditional financial advisor.

“Eighty-one percent [of millennials] wanted their advisor to either manage their money completely independently, or collaboratively with them compared to 86%  or Gen-X’ers and 89% for Baby Boomers — not that different,” writes Barnett, citing a report from Salesforce.

Barnett goes to say that according to the data, a slighter greater percentage of millennials favored face-to-face interactions during financial advisement when compared to older generations. The biggest contributing factor in choosing an automated service seemed to be the lower cost overall.

It is undeniable that the industry is shifting to a certain degree. Robo-advisory firms such as Betterment and Wealthfront have raised hundreds of millions of dollars in venture funding in recent years. Older companies like Vanguard have responded, slashing fees and launching their own robo-advising services to tremendous success.

The question isn’t whether or not people will turn to robo-advising, but if the industry will adapt to this change, bring old school methods to the new millennium in a way that appeals to all.

U.S. Hosts World Energy Ministers for Paris Agreement

U.S. Hosts World Energy Ministers for Paris Agreement

San Francisco, CA – On June 2, 2016, the United States hosted energy leaders from 23 countries and the European Union for the Seventh Clean Energy Ministerial (CEM7) and the inaugural Mission Innovation Ministerial (MI). This is the first meeting of global energy ministers since the historic Paris Agreement on climate change was signed late last year.

Thanks in part to President Obama’s leadership in the United States, global investment in renewable energy has expanded tremendously, with the highest levels achieved in 2015. Also for the first time last year, over 50% of the world’s new electric capacity was generated by clean sources.

Founded at the Paris conference, MI’s mission is to double public investment in clean energy by 2020. World energy leaders used the ministerial in San Francisco to announce specific plans to meet their targets, with each committing to double approximately $15 billion per year—exceeding the original $10 billion annual estimate—in basic funding for global public investment in clean energy. The leaders also pledged to invest almost $30 billion per year into public clean energy research by 2021. To support implementation and accountability, MI partners approved an Enabling Framework and created a Steering Committee.

Meanwhile, at CEM7, leaders from over 50 companies and organizations joined 10 subnational governments and the 21 countries plus the European Union to pledge over $1.5 billion to accelerate the deployment of new clean energy technologies. Some notable stakeholders who participated in the meeting include Wells Fargo, which pledged $10 million toward creating energy efficient startups in a program coordinated by the U.S. Department of Energy; Stanford University, committing to research how to use 50% clean energy in the electrical grid; and Bill Gates, who is interested in investing in MI countries.

The importance of the two meetings was bolstered by findings released on the same day by Bloomberg New Energy Finance which showcase the irreversible trend toward clean energy growth. Renewable energy installations across the world are on their way to increasing by over 600 percent by 2040, adding approximately 4,900 GW of clean power.

However, in order to avoid raising global temperatures by more than two degrees Celsius, the present target to try and stymie catastrophic climate change, the world will still need an additional 3,000 GW of clean power over the next 25 years above the 4,900 GW projection.

Recognizing that developing new clean energy sources may be insufficient to fend off rapidly growing global temperatures within enough time to make a difference, CEM7 leaders also announced funding for CEM’s Clean Energy Solutions Center and three major campaigns aimed at curbing carbon emissions. The campaigns focus on a number of innovations including developing smart cooling technologies (air conditioners with a substantially smaller carbon footprint) and ultra-efficient lighting.

Lending Club and Maintaining Investor Trust

Lending Club and Maintaining Investor Trust

The last few weeks have raised some important issues for Lending Club stakeholders, competing marketplace lenders and investors in the high growth Fintech sector. As fund managers our job is to draw conclusions on how our investments will be affected.

Renaud Laplanche was regarded as a visionary CEO of Lending Club. He had founded his company and led it through many years of record growth. His departure therefore has had a more profound effect than normal. Further the circumstances of his removal by his board of directors has rightly called into question the company’s hard won reputation for transparency, efficiency and trust. We have seen before that once a financial company is questioned for its integrity, business and customers can quickly move away. The most significant impact for Lending Club is currently the suspension of loan purchasing by some of its largest investors including the local US savings banks.

What is clear is this has already affected and will have a long lasting effect on the share price of Lending Club but in our view Mr Laplanche’s departure has not changed the longer term fundamentals of either Lending Club, the loans originated or the industry itself. This statement holds true so long as the issues remain limited to the securitisation criteria for institutional investors and an undeclared conflict of interest in the case of Laplanche’s resignation.

I have been in the securitisation market for 17 years and the issue of eligibility criteria for loan securitisation is not as straightforward as you might think. This is a highly technical list of requirements made by Banks and rating agencies to cherry pick loans for securitisation pools and which requires the seller, in this case Lending Club to repurchase them if they subsequently are found not to be in compliance. I have come across multiple instances in my career where a loan issuer buyback was invoked or disagreements had with the lead arranger and this cost no one their job. Indeed each transaction had its own unique requirements. I am therefore certain this alone did not cost Laplanche his job.

What did cost him his job was a lack of judgement on two profound issues for his Board. Laplanche’s alleged behaviour defending his colleagues cited in the internal investigation when he should have accepted their removal was necessary to restore trust and more critical and fatal to himself, failing to disclose his own conflict of interest in a Loan Fund.

Whilst we are not happy to see a leader of Laplanche’s calibre leave, as credit investors would have noted little if anything has changed in relation to the $18 billion of loans issued by Lending Club to date. However if we to invest in Lending Club loans we expect LendingClub to continue to take all necessary actions to restore confidence and trust.

So to summarise where do we go from here?

  1. The market growth will continue but at a slower rate, the speed of growth last year was unsustainable and some investors will pull back
  2. Trust is hard won and easily lost

Lending club needs investors to grow. We believe it will redouble its efforts on transparency which is ultimately beneficial to the market as a whole, otherwise the investors will walk away.

  1. Regulatory scrutiny is only going to increase

We knew regulation was increasing and regulators like the DoJ will need to satisfy themselves the internal investigation is complete…

  1. Securitisation is not the correct funding model.

The pursuit of growth at all costs led Lending Club to mandate Goldman Sachs and Jeffries to securitise its loan origination. We are not convinced this fits with the simple yet effective business model of marketplace lenders….

  1. Funding from hot money is not real growth.

The sector and Lending Club has become over reliant on generalist hot money hedge funds to fund investor origination. The industry needs to refocus on finding savers and pensions that will take a longer term view of borrowers……

  1. Finally, credit investors have done very well.

We are surprised that amid the headlines we haven’t seen one mention of investor returns. Since inception Lending Club loan investors have averaged 7.93% annualised and funded $18 billion plus in loans. (Source: https://www.lendingclub.com/info/demand-and-credit-profile.action)

Lending club is still a remarkable success story for investors and borrowers.

3 Fintech Predictions for 2016

3 Fintech Predictions for 2016

Finance technology is expanding at a rapid rate and is disrupting the ‘old school’ methods of providing financial services. As digital applications increase, the opportunities for fintech continue to grow. Tech giants Apple, Google and Samsung have reached out into the finance sector with the rollout of payment systems used with their mobile products. In the near future, it is likely they will continue this expansion by establishing banking systems. It is expected that other tech companies, like Facebook, will follow suit and begin their own finance ventures. International commerce companies like Alibaba will begin to expand to new markets in the United States and Europe.

How Technology Will Alter Financial Activity

Businesses must adapt quickly to new technological trends in order to provide convenience to their customers and continue to streamline their accounting. Among the foreseeable changes in finance over the next several years are these 3 fintech predictions:

  1. Point of sale transactions will become app based. Most customers are using smartphones for everyday activity, and paying the bill at restaurants and other businesses with phone apps will become increasingly commonplace. Businesses will be using apps housed on point-of-sale devices in order to remain competitive and not lose customers.
  2. The old will merge with the new. Traditional financial institutions will only be able to stay relevant by partnering with new fintech startups; in some cases, such as PayPal, the fintech company will be bought and assimilated to a traditional financial firm. Bitcoin is another plum ready for picking; it will likely be absorbed by a large corporation and hedged using conventional means. The complexity of regulations will help spur start-ups to merge with more established entities. Traditional corporations will be the source of much of the venture capital many tech start-ups will need to develop and market their innovations.
  3. P2P will become more prevalent. This lending model is easy to access and use, and has become viable enough to expand into new areas of credit risk and finance. As an example, Lending Club just this year has announced it will begin to offer mortgages. This is a particular area of focus for our own firm as we develop our own investment strategy to back the leading P2P companies globally.

The ease of use and mobility of the new fintech will enable a global reach that will spread quickly. Even though at present in 2016 the United States and United Kingdom are the leaders of fintech, this could change rapidly. The growth of the Asian economy will lead to a comparable increase in fintech in China, Hong Kong, Singapore, South Korea and Japan. Other regions with potential for growth the CEE and the countries of Israel. Many will be surprised to learn that Fintech is blossoming in Africa as the technology connects previously unbanked populations and adoption is arguably quicker since it does not need to displace investments in aged technology. Change is coming, and the companies that will emerge on top are the ones willing to innovate and cater to the new millennial consumer class.

 

Sources

http://www.businessinsider.com/the-top-5-fintech-predictions-for-2016-2016

http://banknxt.com/55261/10-fintech-predictions-2016/

http://bankinnovation.net/2016/01/4-fintech-predictions-for-2016/

What Should Banks Do to Attract Millennials?

Millennials are currently the largest and fastest-growing generation of consumers in any industry, particularly in the banking industry. Aged 19 to 35, this generation is starting to make serious financial decisions, such as getting married or buying a house. However, they also show an aversion to trusting in banks perhaps due to coming of age during financial crises, high student loan debt, and recent government bailouts. Because of those damning reasons, banks are less seen as an option to this generation than ones before.

Banks need to secure millennials

Banks need to secure millennials

If banks want to attract millennials, they will have to build trust which is no small feat. Banks have to start focusing on lowering student loan interest rates, offering finance-planning education, and exhibiting a plan towards creating a global difference – something very important to Gen Y.

Growing up during a time of financial volatility in the markets, millennials need banks to go further then they did with the Baby Boomers:

Lower student loan interest rates

With the norm being huge amounts of student debt, banks have to start catering to these large debts like fintech startups SoFi and CommonBond. If banks offered debt solutions, more millennials may turn to them as their financial institution of choice.

Offer finance counseling

This generation wants to avoid financial issues themselves. This is why banks should give easily accessible financial education to Generation Y. Banks have to improve their customer’s understanding of finances through innovative education techniques that can be accessed from any mobile device.

Be Authentic

Millennials want to be engaged with someone they can trust. This doesn’t necessarily mean they want to have a conversation, but they want to be heard. Banks should analyze data and take innovative steps toward millennial-friendly goals.

Millennials require efficiency and trustworthiness

Millennials require efficiency and trustworthiness

Make Access Easy and Mobile

Banks also have to make access to everything easy. Transferring money shouldn’t take four steps. It should be able to happen on one mobile screen in just a few seconds. If banks want to attract millennials, their mobile sites have to allow transfers, bill pay and check deposits, and those sites have to respond quickly. The sites and apps should look good, be responsive and most and foremost: be simple to navigate.

Make a Difference

While millennials do want financial institutions to do a lot for them, it is also important that banks are making a difference in the world. Companies in any industry should be using their sizable resources to invest in sustainability, philanthropy, and global awareness. Corporate social responsibility is becoming more important as millennials take center stage.

If banks want to attract millennials, these financial institutions have to start catering to the unique needs of Generation Y which is what many fintech startups offer. Friendly service is less important than immediate, online access. Home loans are less important than reducing student debt. Banks have to start listening to what this generation wants and taking appropriate steps to address these requests.

Source

AdAge

 

The Three Hottest Industries in Fintech

There is no secret that fintech is at the forefront of investment trends for the coming year. Financially focused technology has sprouted because it can reach audiences that traditional banks have not. However, there are multiple spaces under the fintech “roof”.

Of the many different categories in financial technology, there are three that I believe have the most potential to succeed – payments, institutional financial services, and equity financing.

 

Payments

Justin Farr-Jones Mobile Payment AppsThe digital world has continued to provide convenience for consumers, and the growth of the payment industry hopes to add to that mission. Over the past year, mobile apps have filled this space, but experts plan to see development continue to create faster and more improved payment services. Expect to see a rise in products or services that transmit funds in more efficient and favorable ways.

An increasing amount of banks have explored options to allow users to transfer funds between one another in an easier way. Services like Paypal and Venmo are capitalizing in those areas, thus raising competition. Also, social networks are getting involved in transactions. Currently, Facebook, LinkedIn, and Snapchat have all made significant steps towards building out those features.

The security of payments will also be a populated area in the coming year. Security is a critical focus because of the increase in fintech options for users. The biggest hurdle for attracting new audiences to new financial methods is assuring that the security of their funds and personal information is in good hands.

Institutional Financial Services

Justin Farr-Jones BanksJust as consumer facing fintech services are on the radar; business or institutional financial services are highly anticipated as well. New financial management services must present an easily comprehensible interface while reporting on high-level data like performance measurement and quantitative reporting. There’s the same need for institutions as well. Larger entities already have systems in place, but they’re are looking to leverage new technology to better services and attract more customers.

Institutional financial services that easily integrate with systems already in place is the ideal partnership or acquisition for big banks and firms alike.

An example of this currently in motion is the trend of tech replacing administrative personnel in the finance industry. The demand and investment behind institutional financial services are set to increase in 2016 as more institutions find value in this developing market.

Equity Financing

Justin Farr-Jones CrowdfundingCrowdfunded investment is certainly a more recent option for startup investing, but it’s widely explored by many successful teams looking for initial backing.

For years, investing in early stage companies has been reserved for accredited investors only. Only investors with a particular pedigree could make an investment in a young company by adhering to the guidelines under the Regulation D. Dodd-Frank legislation.

Now, those traditional routes aren’t the only option now for eager entrepreneurs. Regulation CF has opened doors for community investment that has resulted in platforms that allow for consumer and investor support, i.e. Kickstarter or SeedInvest. The number of “funding portals” is expected to increase over the next year and solidify its need among the fintech industry.

As fintech continues to fill the gap for the younger demographic and the unbanked, these three areas are likely to push the envelope in the near future.

4 Emerging Fintech Startups to Watch In 2016

Joining a bank involves one important decision among all others – do they have my best interest at heart?

With the emergence of fintech startups, banks are beginning to see a rise in competition mainly amongst the relatively younger demographic. Financially focused startups are capitalizing in a variety of areas and according to Goldman Sachs they’re expected to consume $4.7 trillion worth of business.

Investors have recognized this trend as well; in 2014 there was an estimated $12 billion invested in financial technology encompassing payment processing and non bank lenders. They provide services of value that are cheaper and easier than going through big banks.

2016 is predicted to a be a competitive year in financial services, see which fintech startups you should keep an eye:

WePay

WePay Justin Farr-Jones

WePay is a San Francisco startup servicing the crowdfunding industry. We Pay processes online credit card payments for sites like CrowdRise or GoFundMe and profits through a 2.9 percent fee and a 30 cent profit from each transaction.

In 2014 alone, WePay rang in $24.9 million in revenue and ranks at No. 62 on the 2015 Inc. 5000. Their B2B and B2C model has earned the company a valuation of $220 million.

Betterment

Betterment Justin Farr-Jones

Betterment is an automated investment platform that personalizes portfolios depending on a user’s interests, spend, retirement plans and other wealth planning factors. Depending on the size of investment, the company charges a commission rate between 0.35 and 0.15 percent, potentially some 2/3rds cheaper than traditional mutual fund managers.

Betterment has been able to grow their assets under management by 200 percent in 2014, from $1 billion in $3 billion in AUM. In the upcoming year, the company plans to add new, exciting products. Their automated 401(k) tool serves businesses and helps them give employers tailored advice around their assets. Participants receive a portfolio of ETFs and have the option to open taxable investment accounts if desired.

CommonBond

CommonBond Justin Farr-Jones

CommonBond is an alternative lending firm based in New York City and they’re taking on a problem that affects the masses. They are focused on ref-financing student loans.

This startup is hoping to fix the U.S.’s $1.3 trillion student debt crisis. CommonBond has raised $35 million in their September 2015 funding round, and expanded to serve graduate students of over 2,000 schools.

Collectively CommonBond has refinanced over $100 million in student loans. The company evaluates potential students who could fall under their program by looking at one’s FICO score, employment history, and savings accounts.

Affirm

Affirm Justin Farr-Jones

Founded in 2013 by the prominent investor and co-founder of PayPal, Max Levchin plans for Affirm to flourish in similar fashion. Affirm provides online store finance to its users the finances to make large online purchases. Based off of their credit, they are awarded a certain interest rate, usually ranging from 6 to 20 percent.

If approved, you can choose to pay off your purchase over 3, 6, or 12 months.

You also have some options of how you pay – debit card, bank transfer or personal cheque.

Affirm has raised $275 million (in equity funding). They’re looking to expand their lending programs and further increase their impact.

Fintech startups have a short but effective history of providing services that the big banks haven’t yet mastered, especially towards millennials. Let’s watch how the four above perform in the next year.

Why Most Fintech Companies Don’t Succeed

Fintech has recently exploded and the industry isn’t expected to slow its speed anytime soon. Both consumers and founders are getting involved in new age technology that is changing the way the financial industry earns revenue and serves the people.

If you’re looking to get into fintech, there are some common pitfalls you should steer clear of Here are the most common mistakes that these kinds of startups make:

 


Don’t fight for lower prices

Justin Farr-Jones FinTechThe way that numerous fintech startups battle competition is by leveraging their attractive prices to oust other businesses as well as traditional banks. Payment processing startups are competing to offer customers better prices in an effort to attract a bigger audience. Yet, the bigger players have the ability to scale in ways that can offer a potential customer more incentives than merely a competitive price.

Rather, fintech startups should place their man power behind areas like their services or technology instead of battling for the lowest cost for users.

 

Thinking that intellectual property can be easily protected

Justin Farr-Jones IPIf you have created technology that you think is innovative enough to protect from an intellectual property perspective, you should take the necessary measures to solidify that protection.

Many times a startup will have a similar idea without infringing on intellectual property. When this happens, the technological aspect that gives your business the edge is now less sacred. If you business model rests solely on your intellectual property then any similar competitors have a fair chance at consuming your market share.

 

Choose the right venture capitalist

Justin Farr-Jones Venture CapitalMore important than discovering investors are determining if interested investors have the experience and network that will help position you in the right direction. Being that fintech started to populate in 2012, finding an investor experienced in complimentary fields can be very valuable.

Finding investors with the right network is very essential in this sector too. Many deals are sparked by relationships in the finance industry. Also, fintech services are often integrated services so in order to create partnerships that support such a model there needs to be an available network.

 

Don’t overlook legal issues

Justin Farr-Jones FinTech MoneyCertain areas of financial services can be highly concentrated when it comes to the legal side of the situation.

There are a number of different situations that bring along a different rulebook of laws. Consider cases like security law in emerging markets, the laws around money lenders, and the laws that accompany privacy of personal data.

Make sure to cover all legal aspects when developing your initial business plan. It’s also helpful to keep your team conscious of the ethics and legalities of every function of your business.

Fintech startups are capitalizing among the younger demographic and the 2.5 billion unbanked adults. In order for this industry to continue flourishing, we must avoid the fatal mistakes of those before us.

 

The Commodity Bear Market and Emerging Markets …are SWF and FX Reserves Sufficient?

Justin Farr-Jones FX ReservesThe bear market in global commodities has had a severe impact on commodity producers and their currencies. Brent Crude has fallen 43 per cent over the past year, trading currently in the $44 per barrel range. As dual concerns persist around both the strength of global oil demand and an enduring price war between shale and OPEC producers, many commentators expect this current oil downturn to be a survival of the fittest.

Commodities other than oil have also suffered, with the Bloomberg commodity index falling 27% in the past year and 42% over the past five years. Specifically the drop in natural gas, coffee, iron ore and copper have exceeded 25 per cent since mid 2014. For commodity exposed currencies, further headwinds also lie ahead in the shape of the US FOMC as it prepares to tighten US interest rates in 2016.

So where you may ask is the a silver lining for commodity producer economies? Couldn’t commodity producers just pivot away from oil and diversify their economies?  Well the grim answer is an emphatic ’no’ , and that history suggests once trapped and dominated by a single commodity (the so called ‘Dutch Disease’ effect) there a few successful examples of breaking free. It is therefore hardly surprising that a decade of strong economic and fiscal revenue growth fuelled by natural resources creates bloated and complacent governments. So what other steps should or could have been be taken?

The conventional answer to this dilemma has been to build substantial buffers or Sovereign Wealth Funds (’SWF’) in the form of fiscal and foreign exchange ‘reserves’ during the ‘boom years’ that can be drawn upon during the ‘bust’. In this current environment you really want to be the commodity producer country with (1) low indebtedness (government debt /GDP) (2) substantial FX reserves and (3) fiscal reserves and deposits in a SWF . With this so-called ‘fiscal flexibility’, you have sufficient headroom to run a counter cyclical budget to maintain economic output, growth and most importantly social cohesion. Most countries have tried to follow this blueprint with varying degrees of success which ultimately boils down to whether those SWF reserves are actually sufficient for a rainy day?

For Saudi Arabia, the IMF estimates oil would need to reach $87 for fiscal break even and nearly 90% of its revenues and 85% of exports derive from oil. The Saudi fiscal deficit of $14.4 billion deficit in 2014 has risen to $38.6 billion in 2015 to be funded by increased issuance of public debt.  This is largely due to the collapse in total Government revenues from $278.9 billion in 2014 to $190.7 billion in 2015 resulting from the oil price collapse. So where you may ask is the silver lining? Well from 2015 and onwards according to the IMF, oil revenue as a percentage of total revenue will fall to 81% and Saudi Arabia is well prepared.  As oil prices surged, public debt was eradicated to 1.4% of GDP by 2014 and FX reserves stood at $654 Billion as of September 2015 (from a peak of $800 billion in 2014). Those reserves are now being called upon to fund and finance deficits during the downturn. In FX terms the SAR has been held at its peg of 3.75 to the US dollar. You could could say so far so good.

Russia, another oil and gas dependent exporter has been under sustained economic pressure from an unwelcome combination of sanctions and the oil price. Russian MinFin estimates its own FX reserves now stand at $322 billion as of September 2015 despite russian ruble volatility, (down from a peak of $596 billion in 2008). Whilst the Trading economics estimates government debt to GDP of only 18% , Russia estimates it’s own budget break even for oil is between US$ 80-$85 per barrel. Importantly for Russia, despite oil and sanctions the MinFIn reported the National Wealth Fund stood at $73 billion as of September 2015, or 6.7% of GDP demonstrating additional buffers. In FX terms, the ruble has continued to depreciate, with 1 US dollar worth 66 rules compared to 45 rules twelve months prior.

Finally in Nigeria, Africa’s largest economy, an economic transformation agenda has been promoted as a means of promoting non-oil revenue growth. This is because according to the IMF oil exports are expected to fall from $88 billion in 2014 to $52 billion in 2015. Nigeria’s importance is seen in the light of it accounting for 35% of sub-Saharan African GDP. Nigeria ultimately needs US $ 65 per barrel oil to achieve fiscal break even and is therefore currently running a budget deficit. However Nigerian debt to GDP stands at a modest 12% of GDP, whilst Nigeria’s weakness stems from declining FX reserves down to $34 billion (from $62 billion peak in 2008) and the depletion of Nigeria’s Excess Crude Account (ECA/SWF) to near zero balance from a peak of US$ 20 billion plus. In FX terms, the Naira’s depreciation has caused the economy significant problems with 1 US dollar worth 198 naira, compared to 167 naive twelve months ago. There are legitimate grounds for concern in how Nigeria can withstand further external economic shocks. Oil is the most important commodity traded in Sub Sahara Africa followed by gold and natural gas. According to the World Bank, eight of the major oil-exporting countries can attribute 90% of their total exports to the trade of their top three commodities; meaning the other 10% of the exports are spread amongst the rest of the economy. Unsurprisingly terms of trade have generally declined too among different economies in the Africa region. “ The 36 African economies with expected terms of trade deterioration are home to 80 per cent of the population and 70 per cent of economic activity in the region” states the World Bank.

We can see clearly differing dynamics in three major oil dependent economies, but fundamentally if you want a good idea of how any commodity dependent country will fare during this current downturn, you could do worse than to take a close look at their FX and SWF reserves since they will need both in abundance to manage both budget deficits and an orderly currency.

The New Era of Coal Market Vandalism

Are we in an era of commodity producers market vandalism? Commodity billionaire Andrew “Twiggy” Forrest thinks so and it’s hard not to agree with him.

The price of metallurgical coal continues to fall in response to the industry’s overcapacity with the last quarterly settlement price of $89 a metric ton, another 4.3% drop from the previous quarter. The price of met coal is now at the lowest level since March of 2005, ​ Bloomberg reports.

Justin Farr-Jones Energy

Many of us recall the boom days of 2011 when the metallurgical coal reached its peak, at $330 a metric ton, as a result of supply disruptions in Queensland, Australia, and China’s seemingly unlimited demand for steel related commodities.

To take advantage of the higher prices in 2011, the major mining companies almost without exception convinced themselves the ‘boom’ was the new normal and increased their capital expenditure, coal output and infrastructure capacity. This capital “indiscipline” plays out with a considerable time lag as projects tend to be multi-year phases and has today created a supply glut whilst the seaborne coal demand from China has collapsed and the global economy slowed.

Australia’s market dominance stems from the fact that it is the largest exporter into the global seaborne market for metallurgical coal.  The Australian response to the crisis thus far has been to increase production (reduce unit costs per ton) and take market share, notably from the U.S. producers, whilst also attempting to kill off the new threat from emerging market coal basins in Mozambique and Mongolia. This has been largely successful with the U.S. producers suffering record losses, whilst the their domestic markets are saturated by cheap and cleaner gas alternatives.

Andrew ‘Twiggy’ Forrest, the billionaire Chairman of Fortescue Metal Group, has called this “an act of market vandalism” by the largest mining houses in the race to the bottom.  Forrest says the iron ore market “is inelastic in demand.. so any further product offering will see the price collapse” and the same logic has applied to metallurgical coal thus far.

For African coal in the Mozambique basin, the only projects that are progressing are those backed by sovereign states, Vale (Brazil) and ICVL (India).  State owned Brazilian miner Vale SA has needed to replenish its finances by selling 35% of its logistics and 15% of the Moatize mine to Japan’s Mitsui.  That transaction in December 2014 ensured financial stability and that Vale could take a long term view of the project and increase production from 5 mt to 22.5 mt by 2017.  Vale will likely only break even at current prices even producing 22.5 mt.  Vale is persevering, partly because its already spent $4 billion to date but more important its production costs will be first quartile and competitive globally, pushing out higher cost producers from the market.  And so the ‘market vandalism’ by the mining “majors” goes on.

After the decade long boom, the bust is also likely to be 5 years or more in duration.  This is a high stakes game where those carrying excessive debt will be downgraded and eventually shut off from capital markets.  The industry is locked into a war of attrition and a spate of mergers, restructuring and consolidation is inevitable.  It has been brutal for the junior miners, who have mostly been put out of business, but now the major mining groups and headed for the end result. Despite the 20% rebound in Glencore’s share price this week, shareholders would be advised not to think the worst is over just yet for the mining houses and traders.