Venezuela looks beyond US to China as customer

AFP/Caracas

Woe is Venezuela, sitting atop the world’s largest oil reserves. Production is down and its top customer, the US, is buying less.

So here comes China to the rescue, among others, as Venezuela seeks to diversify its markets.

Under the late Hugo Chavez, Washington and Caracas had a difficult diplomatic relationship, and they have had no ambassadors in each other’s capital since 2010.

But oil makes the world go round and a buck is a buck, so pragmatism prevailed. The US remained the main destination for Venezuelan oil.

But those exports have dropped, from 1.38mn barrels in 2007 to 906,000 in 2012, according to figures from the US Energy Department.

That poses a problem for Venezuela.

The US pays cash, unlike countries of the Caribbean and South America which import Venezuelan crude under preferential terms or even trade oil for services like doctors and teachers, said analyst Diego Gonzalez.

The US is importing less from Venezuela because it wants to diversify its vendor portfolio, said Rafael Quiroz, former director of the state oil company PDVSA.

In 2012, Venezuelan exports to the US dropped 11% to $37.4bn, amid higher prices for Venezuelan crude and derivatives, according to Venamcham, the Venezuelan-American Chamber of Commerce.

The US is seeking energy efficiency in consumption and has promoted investment and technology in non-conventional oil fields.

It will achieve energy independence in around 2020, when it will be the world’s top oil producer, says the International Energy Agency.

“It is not easy to substitute a client like the US for any old client,” said Gonzalez, president of the Center of Energy Orientation.

What is harder is to have Venezuelan crude keep going to Venezuelan Citgo refineries in the US, as they do not exist in other countries. “That is hard to transfer,” said Gonzalez.

Then there’s China, with its booming energy demand. Venezuela has developed serious economic and political cooperation with the Asian giant.

Since 2008 exports of oil to China have doubled to 640,000 barrels a day. Of that, 264,000 are to pay off loans totalling $30bn that Beijing made to Caracas in recent years.

The IEA, the energy branch of the OECD, laments that Chavez left his country’s oil industry in financial difficulty, with infrastructure in dire need of investment and future oil production in part mortgaged to China.

The agency said the volume and the quality of the crude sent to China vary from month to month and worry Beijing, which could delay payment if problems are not resolved or get worse under the new post-Chavez government.

Private cash fuels commodity trade banks step back

Ex-BNP executives form firm to connect investors, traders; Banks cut lending in $1.5tn-a-year market; Some trading houses also play role of bankers

 Reuters/.Geneva

Private investors and hedge funds seeking new ways to gain exposure to commodities may provide a lifeline to trading houses desperate for the short-term liquidity that banks used to offer.

European banks have cut their lending in commodity trade finance, the $1.5tn-a-year business of financing oil shipments or copper deliveries, ahead of Basel III restrictions aimed at reducing systemic risk after the 2008 financial crisis.

Lending cuts coincide with traders’ growing need for funding due to high commodity prices, especially for oil, where a single shipment can cost more than $200mn at current Brent crude prices.

The liquidity crunch has thrown some trading houses into crisis — forcing several to close or consider takeover bids from bigger competitors, accelerating sector consolidation.

“Investors want a piece of what banks can make in lending to traders,” the president of Geneva’s Trade and Shipping Association, Jacques-Olivier Thomann, said.

Some new investors were prompted to try new ways of getting exposure to commodities after being disappointed by investments in the handful of publicly listed trading firms, Thomann said on the sidelines of a conference.

To fill the funding gap, two former bankers from one of the biggest traditional lenders, BNP Paribas, have started a firm called Commodity Trade Invest (CTI), they told Reuters.

Jacques Begle, former co-head of trade finance at BNP, and Philippe Steiner say they will specialise in structuring the type of deals that helped once-small trading houses in Geneva grow into sector giants such as Trafigura and Vitol.

“Banks are upscaling their criteria radically. They also want equity of $5mn and a cash margin. The banks have also become so heavy that they are no longer able to deliver decisions on time for trading houses,” said Begle, CTI’s president.

“It’s a service that we have outsourced from the banks to investors. They want exposure to the real economy through merchant trading and this is a new alternative for them,” added Steiner, who is vice president.

They said the company expected to offer investors 4-15% margin, depending on risk appetite, and would target borrowers with annual revenues of $100mn to $500mn.

Investors are expected to include hedge funds, Corps and private investors known as “high net worth individuals”.

Large trading houses that have come out trumps in the recent market consolidation are becoming lenders in their own right.

While some trading firms have opted to expand into commodity trade finance, such as Trafigura via its Galena fund, others have been pushed into it to meet customers’ needs for credit.

“Now we are asked more and more to give credit to the roasters,” Nicolas Tamari, chief executive of coffee trading house Sucafina, said at the Tuesday conference.

“We are sort of becoming what we’re not supposed to be: financiers, banks. That’s not healthy.”

Trading houses are not covered by the Basel III rules, although regulators have questioned whether they should come under regulations that apply to the so-called “shadow banking” sector, according to a Swiss government official.

CTI’s Begle warned that for small trading houses to borrow from bigger competitors poses inherent risks to their survival.

“There’s a conflict of interest,” he said.

Private banks have also begun to show interest in providing funding for commodity traders, including Hinduja Bank which last year doubled its commodity trade finance team.

 “There is a traditional know-how in the private banks...and it would make a lot of sense to structure the right vehicles to private bank customers to invest in trade finance instruments.” said Guillaume de la Ville, a professor at the University of Geneva’s commodity trading diploma course.

Pictet Wealth Management’s chief investment officer Yves Bonzon said the Geneva-based bank would consider lending to commodity trading houses but did not yet have a dedicated service.

“Essentially it’s an asset management activity so why not? The only caveat is to produce the kind of returns banks do requires some leverage and we are not very keen on leverage in general,” he said.

Thomann said the scale of new entrants in the business of lending to commodity traders was still small and entailed greater risk for investors than borrowing from a bank.

“You can always find a pool of private investors willing to put up $10mn for a specific deal outside the banking system,” he said.

“But in those transactions you lose the institutional structure, the bank due diligence and its risk management tools.”

Boeing selects GE as the sole engine partner on next 777 jet

Reuters/Seattle

Boeing has chosen General Electric Co as its sole engine partner for the forthcoming 777X, indicating that the US aircraft maker was going ahead with the next generation of its most profitable plane.

“This decision to work with GE going forward reflects the best match to the development programme, schedule and airplane performance,” Bob Feldmann, the vice president and general manager of 777X development, said in a statement on friday.

Rolls-Royce Holdings and United Technologies’ Pratt & Whitney had supplied engines for early versions of the 777, but GE was picked as sole supplier for the longer-range versions of the aircraft that went into service in the mid-2000s.

The wide-body 777 is one of the most successful jets of all time in terms of sales, and airlines are eager for a version that can go farther on less fuel with more passengers.

“We are aggressively moving forward on our (development) plan and will continue to refine requirements with customers,” Feldmann said.

A Rolls-Royce spokesman said, “This decision simply maintains the existing situation in the widebody market in which we are the market leader with over 50% share. We are confident that the proposal we put forward was extremely competitive.”

Rolls-Royce is the sole engine supplier for the Airbus A350-1000, which will compete with the future revamped 400-seat version of the 777, Boeing’s best-selling long-range jet.

The next steps for the 777X would include approval from Boeing’s board for offering the plane to customers and launching it as a committed airplane programme. The planes are expected to enter service at the end of the decade.

However, at least one major Boeing customer, aircraft leasing company International Lease Finance Corp, has urged the company not to rush into development of a new 777 model, saying the current 365-seat 777-300ER would work well into the next decade.

The leasing company noted that Boeing in any case had its hand full resolving the crisis related to the grounding of its 787 Dreamliners jets.

Regulators grounded Dreamliners worldwide in January after a battery caught fire on a Japan Airlines Co 787 jet at Boston’s Logan airport and a battery melted on an All Nippon Airways Co flight in Japan.