The second Green Revolution 2 comments

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The original Green Revolution was the increase in food production stemming from the improved strains of wheat, rice, maize and other cereals in the 1960s created by technologists, which increased the crop yield in underdeveloped countries across the world and prevented large scale famine. Biotech created the first Green Revolution; it looks like the search for energy will fuel the second.

It is ironic that the age of agriculture was supplanted by the Industrial Revolution, but now we have gone full circle and gone back to agriculture to further sustain our advanced industrial society. I have talked before on alternatives to oil and gas --- nuclear power and natural gas --- but these are only viable substitutes from the point of power generation. The other main use of oil is as transportation fuel, and this is where the hottest topic of the day emerges --- biofuels.

There are two main forms of biofuels --- biodiesel and bio-ethanol. The former is obtained by mixing natural oils (eg. palm oil, jatropha oil) into normal gasoline, while the latter involves deriving ethanol from crops like corn, soybean, sugar-cane. Both types are apparently able to operate in existing car engines. Most major countries have started to go into development of biofuels big-time, with the US and China having big government drives and feisty targets to have a proportion of their vehicles run on ethanol in a matter of several years, while some countries, in particular Brazil, already predominantly run on ethanol-powered vehicles.

My point is not so much on the downstream impact of these biofuels but rather, on the upstream. Given the sudden jump in demand for certain crops which can be harnessed for biofuels, there is true potential for them to become cash crops, or "energy" crops. Yet these have hitherto been food crops, and to divert them for energy will be to deprive the masses of food. Many, including energy experts themselves, have hence found a compelling moral argument against biofuels.

Cellusoic ethanol, which basically can utilise many kinds of natural fibre as feedstock, is still under research, yet most people and governments are unwilling to give up the biofuel alternative. The answer, then, must be a drastic increase in supply of these crops so that their food function will not be compromised. The high prices of agricultural products like palm oil, corn, downstream industrial ethanol etc will send the signal to the private sector eg. Archer Daniels Midland, to undertake investment. On the governmental sector, suddenly agriculture might become part of a strategic industry --- energy.

There is an additional incentive for new emerging powers like China and India to grow their agricultural sector. These two countries are predominantly rural (probably 70-80%) with urban development confined to a few metropolises, and hence have to develop a strong rural agenda to reduce social inequality and alleviate social tensions. Sustainable development is the main agenda of the Chinese government for the next few years, and that includes both the environmental and the social aspects. Energy cash crops might just provide one of the main channels for these countries to direct their rural development plans and to undertake massive modernisation. Indeed, it may not be far-fetched to project in the future that their rural economy might just become a competitive strength, if biofuels enter the mainstream alternative fuel market.

The US has recently announced a massive push for ethanol fuel substitutes (including research on cellusoic ethanol) while China has some ongoing programs for soybean zones in the Northeast (Celestial) and is expected to issue licences for bioethanol production (something that China Sun has been perpetually linked to). In India, the government is less involved but Reliance Group, the private sector behemoth, is embarking on a "second green revolution" (hence my title) in biofuels, through R&D as well as bringing the biomass energy generation concept to the rural areas: it is one of Reliance's three main drives for the future. Nearer to us, Malaysia is already refocusing the use of palm oil to the production of biodiesel to cater for the huge demands from European countries, and has encouraged the building of biodiesel plants. From 2007, all diesel sold in Malaysia must contain 5% palm oil.

It is not difficult to observe that the excitement seems as euphoric as a stock market at its peak, and things might just fall over a cliff suddenly (especially if oil prices suddenly dip). However, the clear trend is that agricultural productivity will become a key buzzword, in view of the new demand drivers for (certain) agricultural crops plus the current limited supply capacity (leading to the abovestated moral argument of food crop-energy crop substitution). Key beneficiaries? Agricultural machinery and tools manufacturers, agricultural technology providers, logistics services providers (logistics is part of productivity). It may sound a cliche, but the big beneficiaries of the 19th century gold rush in California were the pick and shovel providers.

References:
(1) Newsweek article 17 July 06: Bigger, Faster, Better
(2) Ethanol market.com
(3) Wikipedia article: Palm oil

Tapering of China's property boom 0 comments

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China has announced another 10% annual growth, which is probably one of the longest sustained booms it has experienced since the booms and busts of the 1990s. Rapid growth has brought with it a different set of problems, and key among them must be social.

Given the increasing income disparity between the rural and urban population, amid a rapidly growing acceptance of capitalism, it is inevitable that there is mass migration into the cities. Add the foreign influx of businesses and their associated white-collar workers. Juxtapose all these to the existing city-dwellers. The real demand for residential housing obviously is there and will keep growing as China's economy continues to develop. Now add the speculative element as foreigners buy up China property in anticipation of prices continuing their stratospheric ascent with the additional plus factor of possible medium-term renminbi appreciation. No wonder the Chinese government is worried, and has been taking steps to curb the speculative element.

Recently the Chinese government has begun raising interest rates, and just this week has followed it up with a series of curbs bordering on administrative controls, including the prohibition of foreigners buying into the residential market, and strict limits on the development of high-end housing, effectively tightening controls on both demand and supply side.

That the China government's moves are so closely watched can partly be attributed to the fact that China is such a growth driver for the global economy. The other reason is that for all the growth of private entrepreneurship these few years, economic control is still top-down. It is difficult to call a peak on the China property market, given that in the past few years the China government has similarly attempted to control property prices to little avail. However regulatory focus on this segment of the economy will constitute a strong headwind --- hence my view that the property boom will taper off. Over the long-term, the government is committed to reducing social inequality --- a corollary of its "sustainable development" policy in its recent Five-Year Plan (see "China looks inward and downward"). Ensuring that Chinese citizens will have affordable housing and are not bid out of their home markets by foreigners will be a key policy focus (those in doubt can look at why the recently departed Lim Kim San was so respected --- he brought affordable housing to the masses).

The property segment most affected should be the residential segment, in particular the high-end which has seen influx of foreign money. Commercial, retail and industrial property should not be hit badly. Losing all these cash cows at one go would hit the municipal governments badly --- they have lost taxing power under the central government, and yet are expected to increase social spending; land sales has been a major money-spinner for them. High and rising commercial and industrial property prices will not generate as much social friction as unaffordable housing (although they do create higher business costs for local entrepreneurs).

It would make sense to avoid property stocks with heavy exposure to the Chinese property market. Capitaland and Keppel Land were downgraded in the wake of these administrative measures but surely these are not the most heavily exposed. There are one or two pure China property plays, some which have listed recently. These are the dangerous ones.

Singapore oil & gas infrastructure construction 5 comments

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The oil and gas theme has been in play for the last 2-3 years already, and the optimism surrounding the industry shows no sign of abating. For potential stock picks into this sector, one need not go further than Singapore itself.

The anchor trends suggest that Singapore oil and gas services companies are well-positioned for the sustained upturn. Let's proceed through a top-down view of the hierarchy of trends. Globally, oil prices are maintaining a sustained uptrend, leading analysts to keep revising their 2006 oil price estimates upwards (US$67 at last count) and also oil majors to adjust their long-term price estimates upwards (these figures are for the purpose of planning large capital expenditures). In the Asia-Pacific, Southeast Asia is seen as a potential hotbed of exploration and production activity, which is explained in a previous article "Southeast Asia as an energy resource hotzone". And finally, Singapore has for long been one of the key energy hubs in Asia, being one of the world's top three oil trading hubs and refining hubs. Given the underinvestment in oil and gas infrastructure during the last decade, the scene looks set for Singapore oil services companies to profit greatly from the ongoing and upcoming infrastructure construction.

Let's omit the offshore infrastructure boom which has benefited the shipbuilding industry and the rig construction industry; less prominent but no less capital-intensive are the onshore oil and gas infrastructure itself. There are three big areas where capital expenditure will be huge in the coming years.

The first is oil storage. It is natural that Singapore could develop as Asia's de facto oil storage hub, given its existing strengths in refining and trading. And yet current storage space -- held by refineries and independent storage operators (Vopak, Oiltanking, Tankstore)-- is inadequate. Consequently, there are several private sector investments to build more oil storage terminals -- eg. Vopak's Banyan terminal, Horizon Terminals (a Middle-Eastern venture), Universal Terminal, Titan (planned), and Oiltanking's terminal expansion. These are huge -- eg. Universal Terminal's construction is worth S$500M to Rotary Engineering which secured the contract. Also on the cards is the possibility of the construction of underground oil storage caverns on Jurong island (typically for strategic storage purposes) which would probably be the biggest project of them all if approved.

The second is refinery and petrochemical plant construction. ExxonMobil and Shell are reportedly planning to invest US$3bn in cracker plants on Jurong Island and Pulau Bukom. SPC had also announced that it would be spending $200M to produce clean fuels at its refining arm SRC. This is expected, given the global shortage of refinery capacity.

The third is natural gas infrastructure. Singapore has historically imported all of its natural gas via pipeline from Malaysia and Indonesia, but recently has been looking into LNG as another source of natural gas to diversify. The $500M cost of the required import terminal is probably more viable following rising oil prices and the recent unreliability of piped Indonesian gas. Such LNG import terminals have already received consideration elsewhere in Europe and the US in past years, and should indeed be gaining strength given the viability for natural gas as a credible oil substitute (see "Natural Gas: Alternative Energy Source"). Indeed, an LNG import terminal could be the first step towards a natural gas export/trading terminal and the development of Singapore as a regional gas hub. There are plans for a regional gas grid for ASEAN members, and should this come to fruition, there will be heavy construction of more infrastructure to support the grid.

All these projects are expected to fill order books all the way till 2010 at least, giving great visibility to order books of companies which secure the contracts. Typically, foreign EPCs (eg. from Japan, US) will be the main contractors for these construction jobs but local contractors will receive sub-contracts to fabricate the structures and provide process packages and instrumentation. Just look at Technics and its meteoric share price surge. Check out its peers.

References:
(1) Department of Energy: Singapore Country Analysis brief
(2) OCBC analyst report 16 June 06: Oil and gas support service sector