hybrid ship hottest commodity asset right nowanalysis a t a time when commodity producers are...

18 Thursday, September 17 2015 BUSINESS REPORT

Opinion&Analysis

AT A TIME when commodityproducers are writing downbillions in asset values andcancelling projects around theworld, one niche area of the

gas market is booming.Hybrid ships, called Floating Storage

and Regasification Units, or FSRUs, offeremerging nations from Egypt to Pakistana cheaper, quicker way to attack powershortages by importing liquefied naturalgas (LNG). They cost about $300 million(R3.9 billion) to build, or half as much asan on-shore import terminal, and are upand running as much as six times faster,sometimes within as little as a year, accord-ing to owners Hoegh LNG Holding andExcelerate Energy.

As prices for the fuel slumped 64 per-cent from last year’s peak, the rout madeimporting the fuel more popular with newbuyers seeking a quicker route to LNGamid soaring power demand. Built at ship-yards in South Korea, Hoegh sees as manyas 55 such vessels in use within five years,from about 20 now and just the one adecade ago.

“The main driver is speed,” SveinungStohle, Hoegh’s chief executive, said.

“Demand for FSRUs follows a drastic

reduction in the cost of LNG. We see thatthis has caused a very strong increase inrequests.”

Hoegh gained 44 percent this year inOslo trading. By comparison, the 79-mem-ber Bloomberg world mining index fell26 percent, led by Glencore’s 57 percentslump as raw materials from coal to copperplunged. Oil still dominates internationalenergy trade because of the ease in pump-ing the fuel onto ships.

Gas was historically sold just viapipelines, which imposed geographicallimits on buying and selling. Now, mirror-ing oil with the added cost of new infra-structure, LNG will account for most of the40 percent gain in inter-regional gas tradeby 2020, the International Energy Agency(IEA) forecasts.

Fastest alternativeFSRUs are emerging as the fastest alterna-tive for imports just as nations imposinglimits on carbon dioxide emissions turn togas, which is twice as clean as coal.

With prices down, “environmentallybeneficial natural gas delivered as LNG isbecoming competitive with coal” in powergeneration, Graham Robjohns, the chiefexecutive of Golar LNG Partners, said inan August 27 earnings call.

Golar LNG has six operating FSRUs andtwo on order. Floating terminals accountfor 28 percent of the import capacity underconstruction, according to Bank ofAmerica.Competition to supply FSRUs hadcut costs of leasing such vessels by 20 per-cent to about $120 000 per day from fiveyears ago, said Keith Bainbridge, themanaging director of industry consultantCS LNG in London. Once the 300-metre

vessels are moored, fuel is transferredfrom arriving tankers through pipes. TheLNG is then converted on-board into gasand typically used on-shore at a nearbypower plant. The idea was copied from theoil markets, where floating production,storage and offloading vessels have beenused since 1970s, according to the IEA.

LNG would probably trade at $6 to $8per million British thermal units through2020 amid slowing demand in core markets

such as Japan, South Korea and China,Citigroup said in July. That compares with$7.10 as of September 14, according to theWorld Gas Intelligence publication.

Prices jumped 72 percent in 2011 asJapan shut its reactors after theFukushima nuclear disaster. They peakedat $19.70 in February 2014.

The average cost to build the floatingterminals will probably more than doublein 2017 from $96 per ton last year as buyers

choose ever-larger vessels, according to theInternational Gas Union, a lobby group ofenergy companies in 91 countries. Thatcompares with $212 a ton for a new on-shore LNG terminal last year, such asPoland’s. On-shore costs will probably peakat $350 a ton in 2016 amid demand forbigger tanks, according to the group.

Global gas demand would rise 2 percentannually in the six years through 2020, theIEA said in June. Jordan received its firstFSRU in May and Pakistan began importsin March. More FSRUs may be needed inLatin America,according to Stohle.

Egypt was a gas exporter until last year.Now, the country is battling power short-ages and encouraging domestic gas explo-ration to meet demand in the future.Imports began in April through the HoeghGallant, moored in the Red Sea port of AinSokhna. The vessel imports enough gas tomeet 10 percent of the nation’s annualdemand. Egypt now receives four to fivecargoes a month from companies includingVitol Group and Algeria’s Sonatrach. Itwill receive a second floating terminal bythe end of September and plans to lease athird unit next year. – Bloomberg

OVER the course of the past fewmonths, Germany has beendescribed, often by the samepeople, first as a villain (in theeuro zone crisis) and now as

an exemplar (in the refugee crisis). How to explain such a seemingly fun-

damental contradiction? The answer issimple: History. Germany’s current toppolitical leaders were largely born aboutten years after the end of World War II.

As such, their hearts and mindsetswere defined by the atrocities committedby their forefathers during the Third Re-ich. As an inevitable consequence, many ofthose post-World War II Germans sufferedfrom serious identity crises. They wereGermans by birth, but they most definitelywere not proud of their roots.

Looking at the past They sought refuge in a bigger and betterworld. It was hence only logical that theybecame the most outspoken co-creators ofthe European Dream.

But how does this influence their be-haviour today, 70 years after the end ofWorld War II? And how does it make themvillains and paragons?

Well, many of those who governedGermany, whether in the immediate post-war era or today, looked at the roots offascism in Germany and concluded thateconomic instability was a pivotal factor inbringing Hitler to power. This is indeedpartially correct.

Many Germans, also in the populationat large, identify economic instability with

fiscal profligacy (incurring large publicdebts) and hyper-inflation.

The images of 1923, when Germanspushed wheelbarrows loaded with cash tobuy a loaf of bread, are still ingrained intheir collective minds.

What they don’t acknowledge – or don’trealise – is that it was not the fiscal pro-fligacy and hyper-inflation of the early1920s, but fiscal austerity and the resultingdepression of the late 1920s and early 1930sthat facilitated Hitler’s rise.

Evidently, the wheelbarrow is just toopowerful an image.

It was hence no surprise that Germanswere such stern taskmasters throughoutthe euro zone crisis. The German govern-ment seemed unforgiving, heartless anduncompromising toward those who hadcommitted the “sin” of fiscal imprudence.

But in the minds of the German leader-ship and the German people, all they weredoing was to save the European Dream.They never perceived themselves aspotential “villains”, even when manywithin the euro zone unjustly did.

But then something even more sur-prising happened. As the civil wars inAfghanistan, Iraq and Syria intensified,hundreds of thousands of people fled theirhomelands and arrived at the shores ofItaly and Greece and through neighbour-ing countries in Hungary.

There was – and is – a lot of understand-able confusion in the EU. Not since the endof World War II has there been such amassive migration of people.

The reaction of countries in the EU tothis overwhelming challenge differedgreatly. Hungary built a fence. Bulgaria,Slovakia, the Czech Republic, Estonia andCyprus stated that they prefer only Chris-tian refugees.

Poland’s Deputy Prime Minister,Tomasz Siemoniak, said “Germans should

not teach us about solidarity”, while”generously” extending the country’s handto a mind-boggling 2 200 refugees over thenext two years.

History Meanwhile, the UK has offered refuge to25 000 asylum seekers – literally a drop inthe bucket. And Germany’s reaction? TheGerman government expects to take in800 000 refugees in 2015 alone, almost 1 per-cent of the country’s present population.

Why? Once again: History. The land ofthe Holocaust will do its utmost to rightthose past wrongs. And thus, the poem byEmma Lazarus, which is engraved in aplaque at the Statue of Liberty, might justas well also adorn the Brandenburg Gate

now: “Give me your tired, your poor, yourhuddled masses yearning to breathe free,the wretched refuse of your teeming shore.Send these, the homeless, tempest-tost tome, I lift my lamp beside the golden door!”

By and large, German reception of thetired, poor and huddled masses has set anexample for humanity. And so it is thatGerman history has made today’s Ger-many both villain and exemplar in the eyesof the world. All the while, Germans aretrying to save their European Dream fromturning into a European Nightmare.

Uwe Bott is a financial risk consultant for largefinancial institutions, corporations andgovernments. Follow him @UweEconomist Thisarticle initially appeared on The Globalist. FollowThe Globalist on Twitter: @Globalist

WEDNESDAY last week,Standard & Poor’s (S&P)downgraded Brazil fromBBB- to BB+ with anegative outlook, giving

Brazil’s bonds the feared ‘junk status’. Whydid this happen and what does it mean forSouth Africa?

The three main rating agencies – S&P,Fitch and Moody’s – each have a scale bywhich it rates the risk of government andcompany bonds – that is, the ability of thebondholder to pay them back. Their scalesare a combination of letters, symbols andnumbers, but for simplicity’s sake note thatA is better than B and more Bs are betterthan less, with a positive or negative signmarking the difference between each scale.In this way BBB- is better than BB+ butbond ratings are divided into two broad cat-egories: investment grade (BBB- and better)and junk grade (BB+ and worse).

Many of the largest international in-vestors in bonds are funds looking for safeplaces to store their money including sov-ereign wealth, pension contributions andinsurance installments. Their policiesstate they are not allowed to invest in junkgrade bonds and when a rating agencydowngrades a country’s bonds below thisline, the demand for these bonds drops.

Brazil entered into this situation due toweak economic growth, a growing fiscaldeficit, high government debt and risingborrowing costs. Government bonds arethe government’s way of borrowingmoney from the public and the yield on thebond is the interest rate they have to paythe lender. The interest rates at the initialsale are therefore the cost of borrowing.

These interest rates are set by demandand supply – the higher the demand for thebond, the lower the yield that needs to beoffered to attract buyers, and vice versa.But due to low demand the yields onBrazil’s 10-year government bond havesoared from 12.5 percent in July to over15 percent in September.

Any new bond issues will have to beoffered at the higher rates making it moredifficult for Brazil to pay its debts. Thedrop in demand due to the downgrade fur-ther increases Brazil’s borrowing costs –just after the S&P announcement, the yieldon the 10-year government bond increasedfrom 14.91 percent to 15.29 percent.

The downgrade in Brazil has sparkedspeculation that other emerging marketsmay be downgraded to junk, especiallyTurkey, Malaysia and South Africa. InJune this year, S&P maintained theirrating of BBB- with a stable outlook forSouth Africa, saying that this was unlikelyto change in the next two years.

South Africa is facing many of thesame risks that led Brazil to its junk status,but it is doing better. Brazil’s budget deficitin 2014 was only 0.6 percent of gross do-mestic product (GDP) to South Africa’s3.8 percent. But where the Treasury hasmade solid commitments to decreasespending and slightly raise taxes, Brazilhas been slack in coming up with a plan.Their deficit is expected to increase to8 percent of GDP in 2015 and 2016.

South Africa’s economy is growingslowly – forecast to be around 1.7 percent for2015 – but Brazil is in a recession withannual GDP growth at negative 2.6 percent.South Africa’s government debt to GDPratio of 39 percent is healthier than Brazil’s59 percent, and while Brazilian 10-yearbonds yields have exceeded 15 percent,South Africa’s are still around 8.5 percent.

A downgrade for South Africa wouldnot be welcome but as yet, we’re not follow-ing in Brazil’s footsteps.

Pierre Heistein is the convener of UCT’s AppliedEconomics for Smart Decision Making course.Follow him on Twitter @PierreHeistein

What Brazil’sjunk statusmeans forSA’s status

❚❚ DILBERT ❚❚ DIARY

Hybrid ship hottest commodity asset right now

The world seesGermany as bothvillain and exemplar

Global gas demand wouldrise 2 percent annually inthe six years through 2020,the International EnergyAgency said in June.

Germans were such sterntaskmasters throughout theeuro zone crisis… But inthe minds of Germans,allthey were doing was tosave the European Dream.

GASMARKET

“SEXBOTS” could seriouslydamage human relationships, aleading robot ethicist has warned.

Experts hope to use artificialintelligence to create lifelikemachines that can talk and havesex like a human. However, Kath-leen Richardson told the BBC thetechnology was “unnecessary andundesirable”.

“Sex robots seem to be agrowing focus in the robotics in-dustry and the models that theydraw on – how they will look, whatroles they would play – are very

disturbing indeed,” she said.She believes that they reinforce

traditional stereotypes of womenand the view that a relationshipneed be nothing more thanphysical.

“We think that the creation ofsuch robots will contribute todetrimental relationshipsbetween men and women, adultsand children, men and men andwomen and women,” she said.

Richardson, a robot ethicist atDe Montfort University in Leices-ter, wants to raise awareness of

the issue and persuade thosedeveloping sex robots to rethinkhow their technology is used. Pre-viously experts have warned thathuman relationships with robotswere set to become commonplace.

Sex between humans andmachines may soon become thenorm. As humans spend moretime in virtual realities – includ-ing online gaming and socialmedia – intimate relationshipswith androids might even improvepeople’s mental health, accordingto a sex psychologist. – Daily Mail

Robots invasion of bedrooms has dangers, expert warns

UNDERSTANDINGRATINGS

Pierre Heistein

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Uwe Bott

❚❚QUOTE OF THE DAYThe best inheritance a parent can give his children is a few minutes ofhis time each day. – Orlando Battista, Canadian-American chemist and author (1917 – 1995)

A FSRU LNG vessel under construction in the dry dock at the Hyundai Heavy Industriesshipyard in Ulsan, South Korea. Hybrid ships offer emerging nations from Egypt toPakistan a cheaper, quicker way to attack power shortages. PHOTO: BLOOMBERG

A street artist entertains, for free, migrants at the compound outside the Berlin Office of Health and Social Affairs as they wait for theirregistration in Berlin, Germany yesterday. The writer says Germany is driven to right its past wrongs. PHOTO: REUTERS