Opinion
- Editorial- Commentary
STCIC : Falling commodity prices
A serious challenge for T&T
There is a clear need for a strong national focus on ensuring that the economy—and, in particular, government ministries and agencies—function efficiently so that expenditure results in genuine improvements in infrastructure and assists, not hinders, competitiveness.
The fall in crude oil prices over the past month has received considerable media interest, especially with respect to the impact of lower prices on government revenue. What has received less attention is the fact that many of the other major commodities that T&T exports have also experienced significant declines.
Over the past three months, all of the major commodities exported by T&T have experienced price declines. As the graph indicates, every major commodity being exported from T&T, with the exception of steel, is now trading at levels below their January 2008 level, in some cases considerably lower. While steel prices are higher than at the beginning of the year, they are also trending downwards, with most analysts expecting further price reductions in the short-term.
Trend in major T&T commodity prices during 2008
(various sources: check
www.stcic.org for details)
Ammonia and urea
experience sharp declines
Fertiliser prices in particular have shown extremely sharp decreases over the past few weeks. Ammonia and urea prices have more than halved in value over the past month. In response to these precipitous falls a number of major fertiliser producers have sought to curtail production in order to remove excess supply and halt or reverse the price decline. This has resulted in a number of plants in Point Lisas being temporarily taken out of production, mainly by bringing forward planned major maintenance projects.
According to the most recent Fertiliser Week Friday News Bulletin, Yara will soon be taking its ammonia plant # 2 down for 20 to 30 days, while PCS will be taking down both its #1 and #2 ammonia plants, though no firm dates or time period were reported.
Meanwhile Caribbean Nitrogen Company's Nitrogen 2000 plant is also currently down for maintenance. These four plants represent a combined capacity of well over two million tonnes a year and with all of the plants out of production there will be an appreciable impact on T&T's exports.
Methanol trending downwards
Unlike the other major commodities, methanol has trended downwards over most of 2008, after achieving record high prices at the end of 2007.
Over the past couple of weeks, methanol prices have in general held up better than other commodities, with no major fallback in prices. However, this is in large part due to the fact that one of the world's major methanol plants (MHTL's M5000 facility) located here in Trinidad, is currently out of operation due to a mechanical problem.
With this plant and other facilities around the world due to come on stream in coming weeks, most industry analysts (for example the Chemical Market Associates Inc) are predicting a decline in world methanol prices over coming weeks and months.
As methanol is an important raw material in many building products, the downturn in the housing market in the US and Europe is expected to feed directly into decreased demand for methanol in the medium term.
Impact on domestic economy
These declines are important not just for the large operating companies directly affected but also for numerous other suppliers of goods and services to these industries and to the wider economy, not least through decreased Government revenue.
Taken together, these commodities account for the vast majority of T&T's exports and price decreases for our major exports negatively affects our trade surplus and the in-flow of foreign currency into the local market.
Decreased commodity prices also feed directly into decreased government revenue through reduced profitability leading to decreases in corporation tax collections.
Given the fact that the petrochemical companies and Atlantic LNG pay higher rates of corporation tax than all other companies (35 per cent of profits as opposed to 25 per cent for other companies), the impact of decreased profits from the petrochemical firms and Atlantic LNG on revenue will be significant.
The STCIC estimates that these companies could account for as much as 50 per cent of total corporation tax receipts.
Decreased commodity prices also negatively impact government revenue because their gas purchase contracts with the National Gas Company (NGC) are directly linked to commodity prices. This means that when methanol, urea and ammonia prices fall, so do the prices realised by NGC. Lower gas prices for NGC means less revenue for the Government, through both reduced corporation tax and lower levels of dividends.
Decreasing commodity prices, coupled with the great uncertainty in credit markets, means that many investors are delaying investment decisions, including in the energy sector.
These delays mean a more uncertain future for local contractors and service companies in the energy sector and the potential for job losses, with resultant knock-on effects on the rest of the economy.
Local energy service companies in the upstream energy sector were already facing an uncertain 2009, given the projected slowdown in drilling.
The squeeze on commodity prices and resultant cost cutting that is now likely to occur in the mid and downstream sectors means that companies servicing the downstream are also likely to face decreases in activity over the next few months.
On the positive side...
The positive side of this story is that lower international commodity prices should feed through into lower prices for many imported goods in T&T: cheaper energy means lower transportation costs, while decreasing fertiliser prices should have a positive impact on already falling global food prices.
Hopefully, the decreasing commodity prices will bring some respite to local consumers badly affected by high inflation, especially of food.
Unfortunately, there is often a lag between falling commodity prices and falling consumer retail prices, not least because many companies will still be holding inventory brought at the higher prices.
Government response
Over the past couple of weeks the Government has embarked on a campaign to try to restore falling public confidence in the economy. They have rightly emphasised the fact that our financial service sector appears to have weathered the global crisis well and that we should not panic just because oil prices have fallen.
Part of this campaign has been around the fact that our energy sector is much more diversified that it was in the mid-1980s and that we now rely upon a larger basket of export commodities.
While this is undoubtedly the case, the economy is still heavily reliant upon just a handful of commodities. This clearly underlines the need to further diversify the economy, especially through going further downstream of our petrochemicals and metals sectors, and the STCIC strongly supports the Government's policy direction in this regard.
Given the current structure of the economy and the lack of linkages between the energy sector and the rest of the economy, the major way in which wealth generated from our resources is shared with the wider society is through taxation and expenditure.
The Government has signalled its intention to continue to spend, as it sees this as crucial for the continued growth of the economy. Given this, there is a clear need for a strong national focus on ensuring that the economy—and, in particular, government ministries and agencies—function efficiently so that expenditure results in genuine improvements in infrastructure and assists, not hinders, competitiveness. If we enhance our competitiveness we will be able to recover much more quickly from any potential crisis and to rapidly take advantage of new opportunities as they become available.
Communication is key
As we face the current uncertain global economic situation, communication between the Government and the private-sector will be crucial. Without regular, open and honest communication, it is unlikely that we will be able to transform our economy and will miss advantages that will certainly come along.
The STCIC is always ready and willing to facilitate communication and to share ideas, knowledge and solutions.
Comments or questions?
Visit www.stcic.org
STCIC is
Trinidad's South Chamber of Commerce and Industry . Petroleumworld does not necessarily share these views.
This
commentary was originally published by Trinidad Business Guardian , Thursday, November 6th 2008 . Petroleumworld
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News 11/10/08
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