Keppel, SembMarine shares tumble on cheaper crude

by VINCENT WEE (6 Sept)

Oil prices fall to as low as US$106 a barrel from July's record US$147.27

WITH the fortunes of rig builders Keppel Corp and Sembcorp Marine so closely tied to oil prices, it's no surprise that both counters took a hammering yesterday as crude looked set to continue its downward spiral.

Oil prices have fallen more than 7 per cent this week, with crude for October delivery sinking to as low as just over US$106 a barrel yesterday. Prices are down by 27 per cent from the record US$147.27 on July 11.

Keppel Corp shares fell 49 cents or 5.4 per cent yesterday to close at a 12-month low of $8.64, while SembMarine shed 18 cents or 5.3 per cent to end the day at $3.23. The two biggest local rig builders were not the only ones affected by the falling oil price. China-based Cosco Corp (Singapore) fell 8.8 per cent to a year-low of $1.87.

Amid a sea of red downward arrows in an overall weak market, almost everything related to oil fell in tandem with crude. Offshore support players Ezra, Swiber and Jaya fell 6 per cent, 2 per cent and 6 per cent to $1.37, $1.31 and 98 cents respectively.

ASL Marine escaped relatively unscathed, easing just half a cent to 99.5 cents, probably due to the fact that its bread-and-butter tugs business is more closely related to the construction industry than the offshore sector, so lower energy prices actually help it reduce operating costs.

Analysts said that the sell-off was a knee-jerk reaction to oil prices. With respective net order books of $13 billion and $9.6 billion at end-June, and deliveries extending until 2012, Keppel and SembMarine are sitting pretty and churning out rigs as fast as they can build them.Deepwater rig charter rates have risen to around US$700,000 a day and owners are still keen to take delivery as quickly as possible.

Although the economics of oil exploration are such that the tipping point is still at least half of the current level, the question on everyone's mind is whether the oil boom will turn to bust. Investor nervousness is exacerbated by the credit crunch, which has resulted in one client of Cosco cancelling an order and a Keppel customer folding.

The other concern is how other business segments will affect performance. Keppel is being dragged down by the weak property market, since it owns 53 per cent of Keppel Land. And for SembMarine, some investors have niggling worries over an ongoing dispute it has with BNP Paribas over US$50.7 million in unauthorised transactions at its Jurong Shipyard unit.

Cosco, meanwhile, is doubly exposed to oil price volatility through its involvement in the bulk carrier market. Since it is also perceived as a player in the dry bulk segment, movements in freight rates and commodities weigh on its stock price too. As a result, falling commodity prices are an additional drag on its performance.

-Editorial Report by VINCENT WEE (6 Sept)

Commodities Sector Research Report

by OCBC Investment Research (3 Sep)

OUTPERFORMING the broad market: Commodities performed well in Q2 2008. Corporate earnings for Q2 2008 were relatively mixed. Compared with last year, fewer companies reported earnings growth, and in general, many succumbed to inflationary cost pressures and saw margins being compressed as a result.

Amid an increasingly challenging operating environment, the commodities sector continued to perform and even surpassed expectations. For instance, Noble Group Holdings impressed with a 191 per cent y-o-y surge in H1 2008 net profit, Olam International posted a 54 per cent growth in FY2008 earnings, while Straits Asia Resources (SAR) dazzled with H1 2008 earnings soaring 263 per cent y-o-y. We believe that the commodities sector will continue to outperform the broad market in H2 2008.

Mid-long term growth intact: Despite recent swings in commodity prices, the medium- to long-term growth profile for commodities remains intact. According to Noble, volumes remain robust despite fluctuations in spot market prices, which it is hedged against.

It remains confident that demand for commodities will grow. Similarly, SAR has been riding on record high coal prices and is enjoying upward price revisions for its new contracts, owing to global demand-supply imbalances. It has raised its average selling price for 2009 delivery by 47 per cent to US$104 per tonne (versus US$70.5 per tonne in 2009).

Global demand for energy has been estimated to grow by more than half over the next 25 years, according to the International Energy Agency, and this will continue to put upward pressure on energy prices.

Hurricane Gustav to boost oil prices? Adding to the tight demand-supply landscape, oil prices could spike should Hurricane Gustav result in production disruptions in the US. According to news reports, at least nine refineries, with together account for 12.5 per cent of US refining capacity, have been closed in anticipation of the hurricane.

Depending on the extent of damage, supply shortages could drive oil prices up, with spill-over effects flowing to coal and energy prices.

Top picks - Noble and Straits Asia Resources: Under our coverage of commodity-linked stocks, we continue to favour Noble and SAR. Catalysts for the stocks include:


- for Noble, the upcoming listing of its subsidiary, Donaldson Coal, on the Australian Stock Exchange in Q4 2008, which will enhance its cash position; and


- for SAR, the acquisition of coal interests in Madagascar and Brunei, which will increase its reserves substantially and let it evolve into a global coal player.

-Research Report by OCBC Investment Research (3 Sep)

Why blame 'speculators' for oil price run-up?

by LEON HADAR (25 July)

Their upward pressure on prices drives down demand; falling demand leads to lower prices

DEMOCRATIC and Republican lawmakers in Washington, led by the two presumptive presidential candidates, have been blaming 'speculators' for some of America's current economic problems.

They indict these people for rising energy prices and the housing market mess. And they want the government to take action against energy traders, short-sellers and other evil-doers.

Senator Barack Obama has promised voters that as president he would strengthen government oversight of energy traders. He has blamed them for the skyrocketing oil prices.

Senator John McCain has called for a 'thorough and complete investigation of speculators' to see if they have been driving up energy prices.

At the same time, responding to pressure from Capitol Hill where lawmakers have placed the responsibility for some of the turmoil in financial shares on short-selling investors, the US Securities and Exchange Commission (SEC) is promoting its effort to curb speculation in financial services stocks, most notably hedge funds. Among other moves, it has introduced new short-selling rules, listing 19 banks and investment banks which cannot be shorted.

The reason for the current obsession in Washington with speculators is simple. Americans - aka voters - are angry about the rising oil prices and shocked by the mayhem in the financial and housing markets.

Since the average American is economically illiterate and is certainly not familiar with the intricacies of global financial and energy markets, he or she will search for simple explanations for their current misery: the federal government - the President and Congress. In this age of the nanny State with its power of regulation, they were supposed to ensure that such bad things don't happen.

Lawmakers and officials, on the other hand, encourage Americans to shift the blame to other targets against which they could vent their rage.

Hence the tendency in Washington to bash the Chinese and the greedy CEOs when American manufacturing jobs disappear, or to scapegoat the oil companies and energy speculators when oil prices rise or to fault hedge funds and short-sellers when stock prices fall.

After all, as they used to ask in Rome: 'Cui bono?' Who Benefits? Since those who invested in commodities in recent years seem to have profited from the commodity price boom which they had predicted, doesn't it make sense to blame them for causing the price hikes?

And aren't short-sellers hoping for bad things to happen to stock prices, suggesting that there is perhaps a direct connection between short-selling and falling stock prices?

It's not surprising, therefore, that these speculators are being depicted in the media, which echoes the spin of the politicians in Washington, as evil geniuses, who through the power of their perfect foresight and flawless investment strategy, have succeeded in exploiting the misery experienced by the rest of us.

For example, I was watching investor and short-seller Jim Rogers being interviewed on CNBC business news programme recently, during which he was accused by a reporter of 'talking down' the stocks of Fannie Mae and Freddie Mac and making them insolvent.

Forget the decades of mismanagement and waste by these two Washington behemoths, privileged through government cronyism. It's Mr Rogers and his fellow short-sellers who are responsible for their disastrous performance.

That short-sellers are not popular with investors who have a stake in seeing certain stock prices go up is understandable. But to say Mr Rogers is responsible for the troubles afflicting America's two mortgage giants is the equivalent of blaming medical researchers who predict a rise in the rate of cancer, as causing the spread of that disease.

And the fact that those medial researchers would benefit from the flow of more grants to help them find cure for cancer won't lead us to malign them as 'profiteers' either.

Indeed, not unlike a medical doctor who discovers that his patient is sick (and will therefore be required to visit the doctor - and pay for his services - several more times) or an investigative reporter who uncovers government corruption (and wins fame and fortune), short-sellers also 'benefit' from the problems faced by others.

Short-selling - very much like hostile takeovers - provides a critical source of accurate information for the players in the market by discovering problems confronting certain firms, suggesting that the current high prices are an over-estimation of their real value.

That kind of information should be valuable to other market participants who could take advantage of it and correct their mistakes. The short-seller will continue to make huge profits if these participants dismiss his information and insist on listening to the optimistic information provided by the cheer-leaders who are interested in continuing to boost the stock prices of the troubled firm.

But even the most successful short-seller cannot force prices for a long time if other market participants discover that his information doesn't correspond with reality,

Restricting short-selling is akin to shooting the messenger if he happens to be a bearer of bad news. It assumes that deflating false expectations is a process that should be prohibited by society while cheer-leading should be encouraged.

As the current mess in Fannie Mae and Freddie Mac demonstrates, the short-sellers seem to have played the role that should have been performed a long time ago by the respective government regulators - detecting the problems facing these two companies.

Similarly, contrary to their perception as malevolent speculators who are driving oil prices up, energy traders are actually helping make the market more efficient. Indeed, challenging a 'fundamental misperception' about 'so-called speculators' driving oil prices to 'supposedly unjustified levels', a 'super-spike' report issued by Goldman Sachs earlier this year concluded that it was just the other way around.

Energy traders were helping to 'solve the energy crisis' by providing incentives for more capital spending on alternative energy. And the Goldman Sachs report questioned the economic logic behind the plans proposed by the administration and Congress to place restrictions on energy trading.

'It is not speculators moving the market, it is the information on forward supply and demand fundamentals that they are conveying,' the Goldman Sachs report said. The removal of speculators from commodity markets would force the market 'to function with less informed views, degrading the price discovery mechanism,' the report said.

New York Mayor Michael Bloomberg is one of the public figures who have been insisting that it would be a mistake to blame the global run-up in energy prices on speculators.

'The big run-up is not because of speculators,' Mr Bloomberg told WNYC television in New York. 'The big run-up is because more and more people are using energy.'

Indeed, the rise in energy prices is being driven by structural factors, including the increasing demand sparked by the growth of China, India and other emerging markets. At the same time, supply of oil has fallen in the US, Mexico and Venezuela and other oil-producing countries. There was also a political factor in the price: traders expected US attack on Iran - with all its implications for the flow of oil down the Gulf. Now that there are hints of a shift in US policy, the oil price is coming down.

In any event, speculators help drive down demand when they put upward pressure on prices. And falling demand leads eventually to lower oil prices. In that case, commodity speculators could take short positions and contribute to falling oil prices.

One wonders if American officials, lawmakers and the media would then praise the speculators for the falling energy prices or accuse them of short-selling.

-Editorial Report by LEON HADAR (25 July)