Amazon invests in delivery start-up Deliveroo

Deliveroo has announced that Amazon is leading a new $575MM Series G shared funding round. This will make Amazon the largest investor in this round.
Amazon joins existing investors T Rowe Price, Fidelity Management and Research Company, and Greenoaks.
According to the company, this series of funding will bring customers the food they want whenever and wherever they want it, offering even more work for riders, and helping restaurants to grow their businesses by reaching new customers.
“Amazon has been an inspiration to me personally and to the company, and we look forward to working with such a customer-obsessed organisation. This is great news for the tech and restaurant sectors, and it will help to create jobs in all of the countries in which we operate,” Will Shu, founder and CEO of Deliveroo said.
“We’re impressed with Deliveroo’s approach, and their dedication to providing customers with an ever increasing selection of great restaurants along with convenient delivery options. Will and his team have built an innovative technology and service, and we’re excited to see what they do next,” Doug Gurr, Country Manager, Amazon UK said.
The new investment will contribute to:

  • Growing Deliveroo’s engineering team based in its London headquarters
  • Expanding Deliveroo’s delivery reach in order to continue offering its service to new customers
  • New innovations in the food sector, for example through delivery-only super kitchens “Editions”, as well as new formats that will help restaurants expand to new areas at a lower cost and lower risk, bringing more choice to local neighbourhood
  • Increased support for restaurant partners, and new tools to offer riders flexible and well-paid work

Read more about Deliveroo in Australia here.

Business Expectations Survey: confidence tanks

Graph: Business Expectations Index, March Quarter 2019.

Business confidence for the March quarter has fallen across the board, with the illion Business Expectations Index for the March quarter 2019 down 7.1 per cent annually. The headline index saw significant declines in the sales, profit and investment sub-indices on both a quarterly and annual basis.
The manufacturing sector is expecting a particularly grim start to the year, with expected sales plummeting 32.4 per cent year-on-year, while profit expectations have fallen 23 per cent. By contrast, retailers are expressing more optimism heading into 2019, with the sector reporting increases in both expected and actual sales, profits and capital investment.
Soft start to new year
There were sharp declines in expectations across all categories of the survey, with sales, profits, employment and capital investment all falling. If these expectations are realised, it is likely that economic performance over 2019 will significantly undershoot the latest forecasts from the Reserve Bank of Australia. Based on the latest survey data, the economy is likely to experience a soft landing in 2019, while any further downturn in business expectations will raise the possibility of significantly weaker economic conditions.
“There were sharp declines in expectations across all categories of the survey, with sales, profits, employment and capital investment all falling,” said illion economic adviser Stephen Koukoulas.”
If these expectations are realised, it is likely that economic performance over 2019 will significantly undershoot the latest forecasts from the Reserve Bank of Australia. Based on the latest survey data, the economy is likely to experience a soft landing in 2019, while any further downturn in business expectations will raise the possibility of significantly weaker economic conditions.”
“The final business expectations results for the March quarter reflect widespread uncertainty among Australian business,” said illion CEO Simon Bligh
“Local factors driving uncertainty include the approaching federal election, while everything from the flow of credit and residential house prices through to regulation and corporate governance will be impacted by the Royal Commission, due to deliver its final recommendations in early February.
“Globally, equity market turbulence in the US, Europe and Asia has carried into the new year. This is being compounded by additional unknowns such as US political division crystallising in the form of an extended government shutdown, Brexit entering its endgame and increasing signs of China’s economy slowing.
“Despite all the noise, Australia’s business landscape remains fundamentally sound, with unemployment historically low, exports holding firm and major long-term government projects either underway or about to start.”
Heavy declines across all indices
“The latest illion Business Expectations survey shows a further moderation in economic conditions at the end of 2018, and indicates a potentially disconcerting start to 2019,” said Mr Koukoulas.
“The decline in the expectations index fits with recent economic news, which shows weaker economic growth, a sharp downturn in housing and weaker global conditions. The 15.5 per cent decline in the Actuals index could also point to a weak end to 2018, a view backed by recent disappointing official data for September quarter GDP.”
The Business Expectations index for the March quarter now stands at 20.9 points, down 12.9 per cent from the prior quarter and marking a fall of 7.1 per cent on a year-on-year basis. Meanwhile, the Actuals index followed a similar pattern, dropping 15.5 per cent between the June and September quarters, and down 3.7 per cent annually.
Bleak expectations for March quarter
Expectations for financial performance are down across the board, with the majority of industries predicting a significant slump heading into the March quarter. The most notable decline in expectations comes in the form of sales numbers, with the overall index dropping by 17 per cent to 30.2 points. Employee expectations also took a hit, with a reported 5 per cent decline, while profit forecasts slumped 12.5 per cent to 23.9 points. Expectations also appear to be on a downswing compared to the previous year, with sales down 11.7 per cent annually and the profit index 8.8 per cent lower.

Sub-indices Expectations, March Quarter 2019.

“The reported decline in expectations came from all categories of the survey – sales, profits, employment and capital investment were all lower than the last uptake,” said Mr Koukoulas. “If these expectations come to fruition, economical performance heading into the 2019 calendar year will significantly undershoot the latest forecasts from the Reserve Bank of Australia.”
Optimism at a low point
Businesses have become less optimistic on growth prospects, with 61.4 per cent of business owners and executives surveyed in December reporting an increase in optimism, down from 66.6 per cent in the November survey. Meanwhile, 27.2 per cent of businesses said they felt less optimistic about growth prospects, compared with only 20.9 per cent in November. The last time optimism responses fell so low was in August 2017.
Optimism at lowest point since August 2017.

“The slowdown in the economy is beginning to affect business optimism,” Mr Koukoulas said. “While not at levels that would signal a hard landing for the economy into 2019, the decline in the number of firms which expressed an optimistic outlook for the March quarter, as well as the rise in pessimism, is pointing at a clear downside risk if the trend continues.”
Selling prices expectations up
Although the economy is expected to make a soft landing over 2019, one element of the data is at odds with this idea – both expected and actual indices for selling prices increased, with expectations up 7.6 per cent over the previous quarter, and up 38.9 per cent compared with the same time last year. Actual selling prices jumped 18.9 per cent over the previous quarter and up 10.9 per cent on the year-earlier period.
Selling Prices Index, March Quarter 2019.

“The lift in expected selling prices in the data is the one point that contradicts the business sector’s slowing momentum, Mr Koukoulas said. It is possible this increase was caused by inflation effects flowing on from the Australian dollar’s recent weakness, but official data on the topic suggests inflation is currently low.

CMA CGM strengthens stake in CEVA Logistics

CMA CGM has signed a new relationship agreement with CEVA Logistics to reinforce the industrial cooperation between the two companies.
We are convinced of CEVA Logistics’ potential. This industrial cooperation will make it possible to accelerate its required transformation and to make it a more profitable and efficient leader in logistics for the benefit of its clients, its employees and its shareholders. It reconfirms CMA CGM as the reference shareholder as well as its long-term partner,” Rodolphe Saadé, Chief Executive Officer of CMA CGM said.
According to a joint press release, this agreement will make it possible for CEVA Logistics to accelerate its transformation by:

  • Bringing CMA CGM’s operational expertise and its experience in corporate transformations to help CEVA achieve its recovery plan faster and more efficiently.
  • Creating new commercial opportunities: as a leader in the sea transport sector with an international commercial network, CMA CGM will generate new opportunities for CEVA Logistics.
  • Adding value to the commercial complementarities between CEVA Logistics’ and CMA CGM’s freight management activities: CMA CGM will transfer its freight management activities to CEVA Logistics, thus strengthening the company and creating economies of scale.
  • Supporting CEVA Logistics’ reorganisation and development strategy: CMA CGM will support additional investments aiming – among other things- at implementing CEVA Logistics’ digital and IT transformation which will stimulate its commercial success and operational efficiency.

This industrial cooperation has received the full support of CEVA Logistics’ board of directors and management. It preserves CEVA Logistics’ assets and identity.
The agreement signed between CMA CGM and CEVA also entails:  

  • A removal of the drag along clause in the relationship agreement previously entered into
  • A voluntary public tender offer from CMA CGM, for a value of 30 CHF per share in cash, for the CEVA Logistics shareholders who wish to sell their shares despite the value creation potential from the industrial cooperation with CMA CGM, which will be pre-announced by November 30, 2018 at the latest. 

Read more:

This week's MHD article is here!

Mike Reed

One of the key differences between Sales & Operations Planning (S&OP) and Integrated Business Planning (IBP), is that IBP includes far more robust financial integration. However, this not only requires careful thought but an entire re-evaluation of how the finance group interacts with the rest of the organisation.
At Oliver Wight, we often see that those organisations that enjoy a successful IBP process, also integrate their finance community in a similar way. One of the most common attributes in these businesses is that finance has been reinvented from its traditional role as ‘a recorder of financial information’ to one of ‘finance business partnering’. This enables finance to become tightly incorporated into the IBP process, allowing the department to become highly involved in crucial decision-making processes, which substantially improves business opportunities. So much so that the Finance Business Partner has become a vital role in market-leading organisations, as well as a major enabler of successful IBP.
Finance business partnering structure
There are, of course, many ways that finance can be structured within an organisation. However, having finance people embedded within the different departments of the company is an extremely useful model to follow, as shown in the structure in Figure 1., used by an Oliver Wight client.
A key advantage of this structure is that although the finance people still have the finance department as their home base, they are highly involved in individual departments, with their guidance sought day-to-day, by team members. They become more familiar with the detail of what is going on in the business and not seen simply as ‘the bean-counter’, who visits periodically and is often just a distraction for the rest of the team.
This model has become more common during recent years, whether the organisation has moved to an IBP model or not. In any case, it is a great structure from which to build the finance roles that will make IBP work most effectively.

Getting the right approach for success
The CFO at a leading company describes the core roles of finance in IBP as being ‘collaborator’, ‘enabler’ and ‘custodian’ (Figure 2.).

  1. Finance collaborates with its business partners and process facilitators through the different elements of the IBP process to help develop and critique assumptions and translate these into financial terms.
  2. As an enabler, finance ensures that all the financial implications are explored and understood, and built into the recommendations that lead to decisions being made within the IBP process.
  3. As custodian, finance safeguards the integrity of the financial projections, making sure forecasts are credible, business cases are robust, performance measures are accurately reported and gaps to commitments are made visible and are understood across the planning horizon. It also ensures that the drivers for the 24-month financial forecast are correctly captured, including volume, sales, trade spending, costs and capital expenditure plans.


Similarly, the CFO at a global manufacturing group, tells us two key principles must be observed by finance if it is to be successful in supporting IBP:

  1. Be ‘roughly right’ rather than ‘precisely wrong’. She encourages her team to focus on the things that make the difference, rather than spending time trying for perfection before they act. This may be a culture change for some, who perhaps have been more used to a high degree of precision in reporting. However, it is important to note that IBP is about the future and is based on assumptions. As such, nothing can be precise, only directional.
  2. Insist on one set of numbers to run the business, with finance driving the integrity of the financial projections. This means all areas of the business use the same ‘source numbers’ and questions are managed through the monthly IBP cycle, rather than off-line or in separate forums.

Answering the five questions
IBP review meetings should be action oriented, not discovery sessions. Key assumptions supporting each part of the plan need to be understood, any changes from previously agreed plans acknowledged, and the implications of these changes identified. Finally, action plans need to be agreed to support the business over a 24-month horizon.
A few years ago, Oliver Wight developed the concept of the ‘Five Key IBP Questions’ – simple ‘must-haves’ that can be applied in any organisation and that can be used in each of the IBP review meetings to ensure they address the key issues facing the business in a standardised way, so plans can be validated and the necessary decisions made.
The finance team has a vital role to play in answering these five questions.

QuestionFinance Role
1.    How are we performing now?·       Report on current financial measures
·       Provide an understanding of where the measures indicate shortfalls to the plan assumptions made in previous months
2.    Is the new plan valid?·       Provide supporting analysis of key assumptions
3.    Is the plan enough?·       Provide financialisation of the new plan
·       Compare new plan outcomes to financial targets
·       Provide understanding of shortfalls
4.    Are there any Vulnerabilities or Opportunities?·       Provide “what-if” analysis and scenario modelling
5.    What is needed to deliver the plan that is not already in place?·       Provide financial support to enable fact-based decisions
·       Support teams in building business cases for decisions

 
Senior leaders chairing the key IBP review meetings need to see information being presented in a business-like and commercial way, and this information needs to be ‘decision-grade’. The Finance Business Partner helps by ensuring that the financial implications of the five questions are properly presented, in a consistent and easily digestible fashion.
Finance’s role in the review meetings
The monthly IBP cycle consists of five major elements as shown in Figure 3. These are the Product Management Review, Demand Management Review, and Supply Management Review, Integrated Reconciliation Review and finally, the Management Business Review
Oliver Wight recommends that finance is included as a key participant in each of the review steps. It is important to define what role finance will play both in the lead-up to the meeting as well as in the meeting itself.

To understand how this works, it is worth unravelling the process and looking at the specific role that finance should play in each process element.

  1. The Product Management Review

For those companies that have adopted a Finance Business Partnering model, the Commercial FBP is likely to be the finance team member at the Product Management Review (PMR). A typical preparation cycle for the PMR is shown in Figure 4.
The commercial Financial Business Partner ensures that any financial information concerning planned changes to the portfolio (e.g. product rationalisations, cost reductions, product changes) have been properly incorporated. Updated information is based on any changes to portfolio plans since the last IBP cycle.

The horizon for the product and portfolio plan must be a minimum of 24 months. In many companies, this horizon is considerably longer, and may be 36 or even 48 months depending on lead times for product innovation and development. Working with the Product Planning Manager (the facilitator of the PMR), finance ensures the resultant financial forecast has the correct assumptions, such as attrition through the funnel, which projects to include at which stage in the funnel, and ramp-up after launch.
The Financial Business Partner also ensures that any financial measures being reported in the meeting (such as the percentage of sales from new products) are correctly captured and reported. Any financial updates to new product projects are also properly evaluated and included in the assumptions. These are drawn from latest information provided to the stage and gate process and from an understanding of recent performance of newly launched products.
Within the stage and gate process itself, the Commercial FBP provides the financial support to development projects including net sales value, contribution, return on investment capital and so on. For each of the projects, they also provide a critique to assumptions and ensure that these are based on credible information.
At the same time, Opportunities and Vulnerabilities are fleshed out, and financial implications understood. For the PMR, Vulnerabilities and Opportunities are likely to arise from such circumstances as delays in a project, or the potential to bring a project forward. The Commercial Financial Business Partner ensures that the financial implications and impact on the business (the revenue and margin in particular) are understood. Decisions need to be made at the PMR, and potentially at other points in the cycle, so reliable information supporting those decisions is required.

  1. The Demand Review

Depending on how finance is structured, it is likely that the Commercial Finance Business Partner also supports the Demand Review.
The monthly demand review process will have been mapped out to describe in detail the various steps that are required to make the Demand Review successful. This includes all the activities that involve finance.

Figure 5. illustrates the key steps in a typical demand preparation cycle.
Finance is involved in many of these steps. Early in the month, reliable financial measures are captured and reports assembled. It is not simply a case of reporting the numbers. Rather, finance provides the analysis behind the numbers. How does the financial performance relate to the plans that were reviewed and approved in the previous IBP cycle? Which assumptions were proved wrong? This requires close coordination with the demand team to ensure that evaluation of the financial measures lines up with root cause analysis on measures such as aggregate demand plan performance and forecast accuracy. Ultimately, there should not be two conflicting stories here.
Modelling and Scenario Planning also require support from the finance team. The implications of the various scenarios on the financial outcomes predicted for the business need to be understood. Parameters used in any models and resultant assumptions and projections must be robust and agreed by the different functions involved. A true indicator of failure here is if someone in the Demand Review says, “Where has this number come from? It doesn’t match mine.”
The consensus process often includes pre-meetings such as Category Team meetings or Pre-Demand Reviews. Finance also supports these. In larger companies, it is possible that Commercial Finance support consists of a team reporting to the Commercial Financial Business Partner. In this case, its various team members support the pre-Demand Review activities and attend associated pre-meetings.
Opportunities and Vulnerabilities for demand are fleshed out and the financial implications determined. This should not simply be a case of finance listing all the Opportunities and Vulnerabilities, applying some sort of probability, adding them up and netting them off, as we have seen in some companies – this makes no sense. Finance must help sort through the various Opportunities and Vulnerabilities that arise and ensure that the focus is on the significant items identified. The objective is to find ways to exploit Opportunities and defend Vulnerabilities – not simply make a long list that is impossible to manage.
Finance consolidates all the inputs that have been received, critiqued and analysed and identifies gaps to financial commitments – this year’s budget, next year’s targets and further out over the company’s planning horizon. However, simply identifying the gaps is not enough. Finance must support the production of gap-closing recommendations with robust financial information. These form a key part of the agenda for the Demand Review itself.

  1. The Supply Review

Where finance business partnering is in place, the Operations or Supply Chain FBP supports the Supply Review and its associated process. As with Commercial Finance, there is often a team in this area, especially where there are multiple manufacturing facilities.

Again, the Supply Review process will have been mapped out with all inputs, outputs, roles and responsibilities identified, and shown in Figure 6.
Where there are multiple manufacturing sites and/or more complex supply chains, the Supply Review process is typically broken up into Supply Point Reviews as well as an overall Supply Chain Review. In this case, various FBP team members support the Supply Point Reviews as required.
The finance team provides reliable financial measures as part of the overall set of performance measures for supply. This typically occurs quite early in the month. As with all performance measures, there is appropriate root cause analysis to understand which assumptions in the plan were not met.
Finance also plays a part in scenario modelling for alternative supply plans, ensuring the financial implications are clear. Opportunities and Vulnerabilities are captured and financialised as appropriate, again focusing on the important few rather than the trivial many. Financial projections are developed so the financial outcome of the supply plan is understood; this includes material and labour costs, inventory, overhead recovery, plant performance and capital plans. Financial analysis is required for decision briefs, dealing with issues such as capacity, shift changes, pre-stocking and alternative sourcing models. Gaps to commitments are identified with gap closing plans proposed and the FBP monitors the profit improvement plans in the operations and supply functions.
All of this comes together so recommendations can be reviewed and decisions made with confidence in full knowledge of the financial implications.

  1. Integrated Reconciliation and the Reconciliation Review

Integrated Reconciliation and Optimisation is a continuous monthly process lead by the IBP Process Leader and the facilitators for each of the three core process elements of IBP (Product Planning Manager, Demand Manager, Supply Chain Planning Manager) work as a team to ensure issues are captured and moved through the IBP process effectively. Here, finance works hand in hand with the IBP Leader and process facilitators to make sure that financial implications are clear and the financial picture builds accurately through the month. This is shown in Figure 7.

Leading up to the Reconciliation Review finance pulls together the financial picture for the company ensuring the forecast reflects the metrics and assumptions from each of the three preceding reviews. So, the full ‘Gap to Commitments’ analysis is brought together for current and future fiscal years. Finance ensures that scenarios and alternative plans for presentation at the Management Business Review have the appropriate level of analysis for decision making by the executive team.
In many organisations, the finance team holds a Finance Review meeting leading up to the Reconciliation Review to ensure the financial metrics are well understood and projections robust. This is where the FBPs from across the organisation come together in a meeting chaired by the CFO.
In some organisations, the CFO may also chair the Reconciliation Review, which is attended by the process facilitators and all the FBPs. The purpose is to identify the decisions required for the Management Business Review and ensure that alternative plans and recommendations have been prepared and are ready for consideration. The focus is on understanding the current state of the business and having gap closing recommendations on the table for decision. As an organisation matures, the focus shifts from gap-closing to re-planning and re-optimising the business. With more robust assumptions and plans, the company can now drive to aspirational targets with better balanced Opportunities and Vulnerabilities.

  1. Management Business Review

As a member of the executive team, the CFO attends the MBR. The CFO is the process owner for the financial appraisal component of the entire IBP process and in some companies also acts as the executive owner for Integrated Reconciliation.
The CFO ensures that all financial plans have been properly evaluated. They may be the custodian of the business scorecard and will certainly provide the key financial metrics for the MBR (such as EBIT, ROIC performance and projections). The CFO ensures that decision briefs are in place for the MBR to enable gap closing decisions, and that appropriate scenarios have been modelled for key Opportunities and Vulnerabilities. The CFO also helps the executive team understand what is at risk.
All of this ensures the MBR is a forum for executive decision-making. The focus is on driving the business to meet its goals and closing gaps to commitments, with the financial implications clearly understood. More mature organisations use the MBR to drive the organisation to aspirational targets using balanced Opportunities and Vulnerabilities as the levers, and built on quality assumptions and robust financial information.
Concluding thoughts
A key differentiator of Integrated Business Planning from S&OP is the inclusion of more robust financials. This delivers much greater value to the company providing a company-wide focus on gap-identification and gap closure and maturing to continuous re-planning and re-optimisation.
To achieve this, the finance community in the organisation needs to play a significant role in the IBP process. It may take a change in culture, moving from ‘keeping the score’ to a much more active role in driving the business. The financial forecast is taken from the same place as all other forecasts – one source of the truth. Properly done, this drives ownership of the numbers by the business, which begins to consistently deliver to forecast, month-in, month-out.
The central role of finance in IBP is to provide a vital business partnership, enabling visibility and accountability for the financial outcome. Finance is pivotal in the development of successful IBP in all areas of the business. It must move to challenge and support the organisation and act as an enabler rather than compliance police. In this way, finance becomes part of leading the business not only in day-to-day activity but by engaging in commercial strategies and solutions that drive better results.
Mike Reed is partner at Oliver Wight Asia Pacific. For more information call +61 3 9596 5830, email information@oliverwight-ap.com or visit www.oliverwight-ap.com.
 

VTA releases full speaker list for 2017 conference

With just over a week until the Victorian Transport Association’s (VTA) annual State Conference in Lorne, the peak freight industry representative body has revealed the full list of speakers that will address delegates over the two-day event, June 4–6.
New keynote speakers include Simon Thomas, Director – Programme Delivery, Australian Rail Track Corporation (ARTC); Jonathan Dexter, Australia National Sales Manager, Viva Energy; Max Kruse, Chief Operating Officer, DP World Australia, Ian Matthews, Regional Operations Manager, WorkSafe Victoria; and CMV-Volvo Product Manager Thiago Leal.
These addresses will be supplemented by panel presentations and discussions from a mix of equipment manufacturers and suppliers, insurance and finance providers, human resources, and superannuation and legal experts.
“Productivity impediments remain the number-one barrier to transport operators being more successful, which is why we’ve built the program around a group of expert presenters and topics that can help delegates improve their operation’s KPIs across the board,” said Peter Anderson, CEO, VTA.
“The program reveals an interesting mix of keynote addresses and presentations from politicians, regulators and industry leaders, supported by several panellists that will share insights and learnings on key productivity drivers of technology, safety, people, customers and equipment during a number of interactive discussions.

Downer to raise funds via note issue

Downer EDI has announced a new $250 million issue of medium term notes.

The issue is for seven year fixed rate senior unsecured notes.

Despite the issue being oversubscribed it was capped at $250 million, at a pricing margin of 205 basis points over swap, which resulted in a fixed rate yield to maturity of 4.6825 per cent per annum.

The slated maturity date is March 2022.

Downer stated that the proceeds from the issue will be used to refinance its existing bridge loan facility the firm entered into for the acquisition of Tenix Holdings in October last year.

NAB and Westpac have acted as joint lead managers to the transaction. 

Bradken buyout falls through

A proposed acquisition of Bradken has collapsed as mining markets remain volatile.

Late last year a private equity consortium, consisting of Bain Capital and Pacific Equity Partners, made approaches for a takeover of the construction and engineering company.

The move, worth around $872 million, drove Bradken stock up 36.45 per cent in a single day. 

However the deal has now collapsed.

According to Bradken, following due diligence of the consortium and the development of a proposal “the recent volatility in global commodity and financing markets has impacted the consortium’s ability to obtain financing on terms acceptable to the consortium”.

“As a result, the consortium has now informed the Board that it is not in a position to make a binding proposal at this time.

“Consequently, Bradken and the consortium have ceased all discussions in relation to the proposal.”

Following this announcement Bradken has now focused on “a number of fast-payback Capex initiatives that are designed to increase EBITDA and overall margins on existing volumes”.

This includes the recent acquisition of a foundry in India and cost reduction activities.

Bradken also has a gloomy outlook ahead, stating that while it “remains well positioned to navigate through this volatility, there are no visible signs at this stage of a turnaround in the mining cycle”.

The manufacturer will announce its results in early February. 

A crash in gas use is more likely than the forecast ‘shortage’

Gas developers have been ominously warning of impending gas shortages in New South Wales, with official forecasts from planning authorities pointing to steady or rising demand. Yet our analysis suggests that these forecasts are likely well off the mark, that gas demand in NSW will fall, and that in reality NSW is facing an inevitable price shock, not a gas shortage.

With prices rising, consumers who reduce gas use and switch to alternatives might well weather the storm best, and that could mean a big drop in the demand for gas. Our analysis suggests that gas demand in NSW could fall to as much as half within ten years.

That could mean that gas investments being made now might never pay off – a similar situation to that in the electricity market, in which demand was forecast to rise continuously but fell instead, leaving infrastructure worth billions of dollars standing under-used, while people on tight budgets felt the impact of price shocks that seemed to come from nowhere.

Gas prices on the rise

Six liquefied natural gas (LNG) plants are being built in Gladstone, Queensland, with the first of these having commenced export earlier this month. For the first time, eastern Australian LNG will be exported to Asia, in huge volumes – twice as much gas as is presently used by all eastern Australian residents and businesses.

This means that eastern Australian gas is now – and for the future – linked with global gas prices (as has been the case for many years with crude oil). The price consumers pay for gas has already gone up and will continue to climb.

What will this do to domestic gas demand in NSW? Our research, summarized in the chart below, shows a possible future in which NSW gas consumption falls to half of its recent heights in as little as 10 years.

NSW gas demand: history and future scenario
Melbourne Energy Institute

How likely is this to happen? There are several factors.

First, it is widely recognised that in the coming years the amount of gas burned to generate electricity in NSW will fall dramatically. Gas is already being priced out of the market by the competition with other lower cost generation, in a substantially oversupplied market. Reductions in the electrical power sector could reduce gas use in NSW by around 35 petajoules per year, an amount equal to around half of the gas used in NSW manufacturing.

Next, householders and commercial building managers are finding that the most economical ways to heat living spaces and water in NSW do not involve gas. Reverse-cycle air conditioners, for instance, can harvest up to six units of renewable heat for every one unit of electricity used.

The transition from gas to electric heating could start as soon as this winter, as homeowners realise that the air conditioner they installed the previous summer can heat their home more cheaply than gas. As solar power feed-in tariffs wind up in NSW, householders will find that electric heat pump water heaters are an efficient way to store “excess” self-generated energy for later use. Such fuel-switching options, when added to ongoing energy efficiency upgrades, will result in significantly less gas being used in buildings in NSW.

Eventually, small consumers will begin to question the logic of paying two sets of grid connection fees to provide their energy services, and gas will be the one in jeopardy.

That leaves the manufacturing sector. Unfortunately, the now-inevitable steep increase in wholesale gas prices will put pressure on gas-intensive businesses in eastern Australia ranging from chemicals producers to brick makers to food processors, causing some to become unprofitable and close. Because of their high exposure to gas prices, the impact on the manufacturing sector is likely to be far more severe than experienced during the recent electricity price rises.

Fortunately, there are things businesses can do to remain profitable, and there are actions that governments can support. Energy-efficiency measures such as those identified under the recently terminated Energy Efficiency Opportunities program are now more likely to be implemented because of expensive gas. The NSW government’s Energy Savings Scheme offers incentives for businesses to save energy.

Similar to what building owners and managers will be doing, industries that burn gas to produce low-temperature heat can consider doing the same job with heat pumps and electrification, whereas others might switch fuel to biomass, biogas or even coal. In the longer term, direct geothermal, solar heat, and biogas sources can replace nearly all of the fossil gas used for industrial heating.

The gas fallout

As described above, rising gas prices will probably cost some people their jobs. Already there are calls for lands to be opened up to unconventional gas extraction, in a bid to ease prices. But more gas extraction will not impact local supply and prices unless international prices and demand very significantly decline.

With gas firms eyeing the possibility of wide-scale coal seam gas expansion in NSW to match the rapid development already seen in Queensland, it will be crucial for government, business, and the community to decide how, when, why gas should be developed. Among other things, climate change and the global carbon budgets should be factored in.

These decisions should be based on the best information that considers a range of credible futures, including the possibility that the pressure on local demand is significantly on the downside.

The Conversation

This article was originally published on The Conversation.
Read the original article.

​Will oil slide to $25 a barrel?

As the oil price retreats aggressively from historic highs,
some are predicting a further fall for the commodity.

Oil reportedly fell around five per cent earlier this week, according to Reuters, after the International Monetary Fund cut its 2015 global
forecast in the face of lowered fuel demand and potential contango.

This latest movement has now seen OPEC member Iran predict a
continued downwards trend for oil to $25 a barrel unless OPEC action is
immediately taken.

Iranian oil minister Bijan Zanganeh said the country sees no
likelihood of OPEC action to stem the fall, with the potential for it bottom
out at the $25 per barrel mark.

But how did the market reach this apparent impasse
of lowering price coupled with inaction?

Head of oil research at Societe General SA, Mike Wittner,
told Bloomberg “the market is continuing to price in weak fundamentals in the
first half of this year,” adding that “there’s also been a return to risk
aversion because of Greece [and its potential exit for the Euro], something we
haven’t seen in a while”.

Much of this fall
has been driven by technological leaps and the ability to tap in to shale oil,
particularly in the US, which has seen this market grow 90 per cent since 2008
( with forecasts seeing it grow from .32 tcf of gas in 2000 to a
projected 9.69 tcf by 2020
), and a global over-investment in oil
production.

Even in the face
of this slide OPEC decided to not cut production late last year,
further weakening prices as well as its power as a cartel as many of these
member nations see the price slide below their break-even watermarks.

For the first
time since its formation in 1960, two of the top three oil-producing countries
(the United States and Russia) are outside OPEC. While OPEC controls low-cost
oil, it has lost supply control at higher prices and cannot push prices up like
it could in the 1970s – or at least, not without stimulating a lot more supply
from elsewhere.

According to the
US Energy Information Agency, the United States now produces 11.1 million
barrels of oil per day – about the same as Saudi Arabia (11.7 million barrels)
and Russia (10.4 million barrels).

This new
situation is a free-for-all between the three major players: OPEC (led by Saudi
Arabia), US-based private oil companies, and Russian state-controlled oil
firms. All three groups have the same reason for wanting to produce more – they
need or want more money in the short-medium term to satisfy their current
spending, shareholder and salary expectations. Amid this competition, cutting
production on purpose isn’t such an attractive move.

Despite this gas production projects around
the world are on the increase
and this will
result in more falling prices, just as it has done for iron ore and coal.

These current economic conditions have driven fuel to six
year low, reaching a trough of $46.23 earlier this week.

Because we have record oil production now, the falling rig
numbers are not creating an immediate positive impact in bolstering
prices,” Phil Flynn, analyst at Price Futures Group in Chicago told
Reuters.

“In fact, they
may be creating just the opposite impact; reminding us how poor demand is.”

The current market is eerily similar to that found just before the Global Financial Crisis, where oil had spiked from $80 to $147 per barrel
and then plummeted to $35 per barrel within six months.

However in what may cheer the market, the price then swiftly
drove upwards towards $80 again, all within the space of 24 months.

How this will play out in the current market is yet to be
seen.

Aurizon carries out share buyback

Aurizon has announced it will carry out an on-market buy back of its shares.

According to the logistics and haulage company it will purchase up to five per cent of its issues share capital, approximately 107 million shares.

Lance Hockridge, Aurizon’s CEO, said “the buy-back reflects Aurizon’s strong balance sheet and highlights our ability to return capital to shareholders, while also maintaining the flexibility to fund growth projects”.

Aurizon’s growth projects include the massive Galilee rail development with GVK, in Queensland.

The newly announced buyback will start after fortnight, with plans to run the scheme for a year.

However “the timing and actual number of share purchased under the buy-back will depend on the prevailing share price, business and market conditions, and other considerations,” Aurizon said in a company statement.

“All share purchased under the buy-back will be cancelled,” it added.

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