Bull and bear: China set to rival OPEC in the oil business - The Share Centre Blog

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Michael Baxter

Bull and bear: China set to rival OPEC in the oil business

Written by: Michael Baxter on February 20th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: China set to rival OPEC in the oil business. Kloppers is off, as are BHP profits. Problem or just normal? US money supply growth hits four year high. More encouraging news from Germany. Abe blinks. Companies in the news: Pendragon, InterContinental Hotels Group, Brammer

China set to rival OPEC in the oil business

Paranoia. The US is attempting to create a kind of economic imperialism, via its giant oil companies with assets across the world. For that matter so are the UK and Holland, thanks to the likes of British Petroleum and  Royal Dutch Shell. The reaction in the US to BP and the Gulf of Mexico oil spill was nothing less than a reaction against such imperialism.

Before you rush to say poppycock, and point out that BP is BP, and not British Petroleum, ask yourself this question: Why are the critics of China making pretty much those same arguments regarding China’s moves in the global oil industry?

It probably is poppycock to say that the UK and the US are employing imperialistic tactics to try to dominate the global oil industry. For one thing, their control over assets in certain countries is not that solid. BP’s experience in the US and Royal Dutch Shell’s experience in Siberia illustrate the point.

China has been buying into foreign oil companies and, according to the International Oil Agency, by 2015 the output of Chinese owned oil companies will be equivalent to the oil output of Kuwait or the United Arab Emirates. Indeed the total output doubled between 2011 and 2012.

With that news, China’s critics jump on board. They accuse China of practicing imperialism; of trying to build up control of the oil industry so that it can blackmail the rest of the world.

It is slightly odd, because the Chinese buying spree has given it control over oil resources in the US. Can you imagine what would happen, if China was to say to the US: we are withholding supplies of oil from companies we own, including those on your soil? If this really was China’s aim, don’t you think it would have stayed clear of buying US based assets?

The ‘FT’ quoted Fatih Birol, chief economist at the IEA, who said the main drivers of China’s expansion in the overseas oil industry were “commercial interests”.

In other words, China reckons buying into oil is a good commercial move.

But supposing China did try to use its oil assets to exclusively meet its own demand. Aside from the fact that such a move may not be in China’s economic interest, so what? Demand for oil is demand for oil. And if one major oil consumer finds a new source of oil, does that not mean the rest of the oil industry will supply the rest of the world?

One of China’s biggest critics is Google chairman Eric Schmidt. It has been speculated here that Mr Schmidt harbours political ambitions, and he does not like the way China supposedly hacks into western computer systems and does not like its attitude towards freedom of information over the Internet. Mr Schmidt may be right.

But please let’s keep the paranoia in perspective. If China really is trying to dominate the global oil industry it does face some major hurdles, including the fact that the US is heading for oil self-sufficiency.

Kloppers is off, as are BHP profits. Problem or just normal?

They say that when he was a soldier on national service for the South African army, Marius Kloppers carried a tired German Shepherd over his shoulders and back to camp.

Since he has been CEO at the world’s largest miner, he had to shoulder the blame for a failure to merge BHP Billiton with Rio Tinto, Potash and indeed agree a joint venture with Rio.

To paraphrase Hollywood, he couldn’t ‘blame it on Rio’ either, although he may have been able to partially blame Chinese objections to the Rio Tinto proposed merger.

Back when he was on the major acquisition route, BHP Billiton had so much money it didn’t know what to do with it.

Not that the company is quite making money hand over fist like it used to. The latest half year profits were down 58 per cent at $5.68 billion. Write-downs in its aluminium and nickel businesses did not help the bottom line.

Now Marius is off. He is stepping down as CEO in May, after around six years in the job. Ex Rio Tinto man, and head of BHP’s base metals division Andrew Mackenzie is taking his place.

There is no whiff of scandal, no hint of forced departure. It is not like when Tom Albanese resigned as the CEO at Rio, after the company suffered a £ $10 billion plus write-down last year. It is just that six years is a long time to be running the world’s largest miner. Even so, Mr Kloppers surely lost some of his authority after his string of failed mega M&A attempts.

Nonetheless it must have hurt. Mr Kloppers may be tough, but when shares rise, hitting a 17 month high on the news of your successor, his pride must be wounded. There can surely be few things like seeing markets celebrate your departure to dampen your confidence.

US money supply growth hits four year high

For some reason the Fed does not publish figures on the US broad money supply. Not sure why, but if it had done so during the noughties, more attention may have been paid to the financial bubble that was being formed.

Capital Economics, however, does publish its own measure of the US broad money supply.

Its measure grew by 6.5 per cent in January year on year. That was the highest growth rate in four years.

And before you say that surely means inflation, don’t be too fast. In recent years growth in the broad supply has been awful. The current growth – the current four year high growth rate – is consistent with 2 per cent inflation.

Maybe this is evidence that the Fed has learnt lessons from the 1930s, when the broad money supply pretty much crashed out of sight.

And maybe this is evidence that the US economy really is enjoying sustainable recovery.

More encouraging news from Germany

The official data may say contraction, but evidence that Germany won’t fall into recession is mounting.

Just to remind you that in Europe we define a recession as two successive quarters of negative growth. In the US a recession occurs when National Bureau of Economic Research decides that’s what the various sets of data, including GDP and employment stats, suggest.

Germany contracted in Q4 last year. Surveys suggested it grew in January this year. Yesterday the latest ZEW index of investor sentiment rose from 31.5 to 48.2, the highest level since 2010.

The survey is not the best guide to future GDP, but it is a guide. This is not proof that Germany is on the mend, but it is at least some kind of evidence.

Abe blinks

I will do this. I will do that. Under me, we will have more fiscal stimulus, and more proactive monetary policy. We will be less tolerant of China, less pacifistic.

Japan is not known for its radicalism, not these days anyway. It is conservative through and through

When it says it will hit the economic nuclear button, and launch QE big time, the markets sold yen, but some were more cynical, and said talk of currency wars was overdone.

Who was right?

This morning Shinzo Abe, Japan’s radical Prime Minister, said the need to buy foreign assets had decreased.

Why did he say that? Tick the box: Because the country has done so much already. Or because Mr Abe – who remember has been Japan PM before – is really not that radical after all.

Next stop, compromise with China.

Companies in the news

Bull:       At the ‘Telegraph’, Questor gave Pendragon the once over. Signs are that UK car sales are going well, but it said that it is early days, and the economic backdrop remains weak. But its conclusion: “Pendragon is a buy; Britain’s car market poised for further growth.”

Bull and bear:    At the ‘Times’, Tempus took a look at InterContinental Hotels Group. It says positive things about the company, the way it has been returning cash to shareholders and progress in the US and China. But it felt these positives were reflected in the share price.

Tempus also reviewed Industrial maintenance company Brammer. Once again it had good things to say, but said as a proxy for European trends shares look high enough.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: BHP Billiton Marius Kloppers Andrew Mackenzie, Brammer, China oil Opec, German economy recession recovery ZEW, Intercontinental Hotels Group, Pendragon, Shinzo Abe end of currency wars, US broad money supply

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