By Michael Hinton, Chief Strategy and Customer Officer at Allegro Development Corp.
The LNG market today is vastly different than it was just a few years ago, and it will continue its upward swing into becoming a large portion of the world energy mix. In fact, according to the 2018 BP Energy Outlook[i], LNG trade is growing seven times faster than pipeline gas, and by 2035, it will account for around half of all globally traded gas.
While expanding into the LNG global export market can be profitable, proper LNG portfolio management represents a series of major, ongoing challenges. The trading lifecycle of LNG involves a large number of players responsible for a host of functions – natural gas suppliers, liquefaction plants, transport operators, terminal operators, regasification plants, storage facilities, pipeline operators, and natural gas utilities.With these functions comes the natural gas production, liquefaction, loading transportation, unloading, storage, regasification, and distribution,along with the management of the many associated financial processes. All these functions and processes make an LNG business a complicated undertaking.
Global LNG exports are creating more opportunity and adding more complexity
Now that the United Stateshas been ramping up its LNG exports and the balance of natural gas supply and demand worldwide has shifted drastically, the traditional global supplier and customer relationships in this market are rapidly changing.With this shift in the global supply and demand comes vast opportunities, but also adds even more complexity to the portfolio management of energy companies that sell and purchase on a global scale.A traditional domestic gas supplier will see LNG cash cycles lengthen due to the time and logistics required for LNG global transportation. Throughout these cash cycles, energy companies have to keep top of mind the price fluctuations in natural gas, credit risk on foreign entities, currency exchanges, and other factors when executing trades and managing assets. The ability to accurately track all of the aforementioned variables can seem impossible, and many large energy companies have still not mastered this abilitiy.
Increased market competition and oversupply is shrinking trade margins and amplifying risk
In the US alone, LNG exports quadrupled last year, and in the next 5 years, is projected to become the number two supplier of LNG. With gas production rising, domestic gas prices have fallen, creating a competitive advantage for US companies to export LNG to global buyers. “This business can be thought of as an arbitrage between low domestic prices and high global prices, although it is not an inexpensive opportunity to exploit.” –U.S. Commodity Futures Trading Commission (CFTC)[ii].
In response to the evolving market, traders across the world are expanding their LNG businesses to gain efficiencies in logistics and operations in order to maintain margins. However, as presence in the LNG market increases, risk increases as global exports require a much more complex logistics chain and longer pay cycles, which means these companies require more hedging and credit risk analysis capabilities.
Additional optionality can improve margins. Or not.
Charif Souki, Chairman at US LNG developer Tellurian Inc[iii]. said that in the next two years, some 20 cargoes would be available every day on the spot market, or 5,000 cargoes a year. “You’re never very far from a cargo.”
Having options can be a good thing, right? For those in the energy market, trading and logistics options come with a price: increased risk exposure. With operating expenses, fuel/raw materials and deductions all impacting the bottom line, producers and traders are having to also take into account the many transportation and storage options that are now tied to each global trade.
Alternatively, if domestic gas prices become too volatile, natural gas utilities and natural gas generators will find it possible to supplement or replace their natural gas supplies with LNG imports. Because of energy market volatility, the tricky part for buyers is knowing when to purchase, how much to purchase, and who they should purchase assets from.
LNG trading contract changes are forcing producers and buyers to renegotiate
S&P Global Platts[iv] and other leading industry experts have projected that continued growth in global LNG exports will mean more competition in the market, resulting in more short-term options for buyers who decide to renegotiate or completely do away with long-term contracts. Customers of existing long-term contracts that are reacting to oversupply conditions largely fall into two groups: those that are seeking to re-negotiate pricing and those that do not have enough demand to meet their contractual commitments. That said, producers and buyers are reconsidering and renegotiating their traditional sales purchase agreements (SPAs).
Reuters [v]is reporting that Indian gas utility Gail has switched its LNG purchasing focus to short-term and spot deals in order to meet rising demand and they are making greater use of hedging against price volatility. Other companies have followed suit, signaling an uphill battle for producers as lower spot prices for global oversupply will continue to result in more contract revisions.
Many market participants are now contracting under an LNG master sales and purchase agreement (MSA), specifically intended for use with spot and short term agreements with substantial flexibility for the buyer and seller to customize the agreement to their needs.The rise in short-term contracts has led to a significant increase in the number of participants in the LNG derivatives market, which will enhance optionality, but add long-term market exposure, which adds yet another layer of complexity to global energy portfolio management.
These industry changes have not only altered the nature of how LNG contracts are structured, but also has affected spot pricing and trade margins, resulting in a shift away from the traditional producer and consumer relationships to a more competitive trading market. Additionally, the development of a deep and competitive LNG market is likely to cause long-term gas contracts to be increasingly indexed to spot LNG prices.
The need for a sophisticated, modern commodity trading platform
The already complex natural gas and LNG portfolio value chain continues to become even more complicated as the global export market grows, market competition increases, oversupply outweighs demand, and LNG contracts shift to spot or short-term agreements. Depending on how proactive industry participants are, these market changes can either provide businesses with growth opportunities or spell out a recipe for disaster. It is important now, more than ever, that industry participants are prepared for drastic changes in portfolio management and supporting software infrastructures.
LNG producers, LNG traders, LNG transporters, natural gas utilities, and natural gas generators who lack strategic insights and responsive technology are limited in their ability to see the full picture and portfolio exposure. This increases the potential for risk as positions and inventories aren’t being optimally managed. In addition, insight into the true underlying exposure to pricing markets is hidden. As a result, decisions might be made without the best possible information, leading to not only increased operational risk, but also missed growth opportunities.
In order to effectively manage portfolio risk and take advantage of opportunities created in a constantly evolving energy market, companies require an enterprise software platform that not only provides full value chain management, but also advanced quantitative risk analytic capabilities that can aid in valuing, modelling, and hedging of physical assets and derivatives. A comprehensive commodity management software (also known in the industry as CTRM or ETRM software),such as Allegro Horizon, will further address energy market opportunities and risks by integrating all physical and financial aspects to manage the entire LNG lifecycle, from production of the natural gas, through liquefaction of natural gas to LNG and transportation of LNG, to the re-gasification of LNG back to natural and consumption and distribution of the natural gas.
Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations
White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures
According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.
While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”
Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”
Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”
Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors. Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”
A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.
According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”
Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.
How are investors traversing the UK’s transition out of lockdown?
By Giles Coghlan, Chief Currency Analyst, HYCM
Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.
This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.
Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.
To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.
At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.
A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).
When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.
Looking at the road ahead
So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.
It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.
A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.
High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.
Hatton Gardens 5 top tips for investing in Diamonds
By Ben Stinson, Head of eCommerce at Diamonds Factory
Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.
For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?
Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.
1: Using cut, weight and colour to determine value
Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.
Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…
Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.
3: Find the source
Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.
Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.
Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.
It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.
Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.
5: Patience is a virtue…
If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!
Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.
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