Voyaging for Value

SINGAPORE : AN ISLAND OF STABILITY


Since I spend so much time on the road, it is a rare and agreeable experience to spend one complete week in the office.  Singapore does seem like an oasis of tranquillity given all that is going on in the world today.  The country is calm.  It is efficient, clean, and well run.  It is a good place to do business.  And I have an extremely nice view out of my window so any readers who want to stop by and see for themselves are welcome.
Seven days with no movement does not mean things are not going on.  Let me give you a snapshot of a normal work week for a fund manager.  Monday lunch with one of Singapore’s leading family offices included a deep dive into the world of almonds.  The Californian drought is creating a shortage of this nut; and if the water crisis continues in California - as seems likely - it will be hard to explain why so much water is effectively being exported because of the sale of a large amount of almonds abroad.  

Part of my view

We had visitors including a major Russian broker, the head of the leading independent investment bank in Myanmar, a New York Fund of Funds, a team from a leading Japanese bank to discuss a potential transaction in Indonesia, a London based fund management company, a manganese miner building a smelter in Sarawak, a manufacturer of solar powered water heaters operating in China, but listed in London, and a Hong Kong broker.  The point of belaboring the above is that Singapore really is one of the great financial centres.  People in the investment industry from all over the world come through.  Yes, the most valuable thing we do is to go out and meet companies on their home turf and see first-hand what is going on and tie that back to the financials; but we also get a lot of visitors.  These meetings are particularly useful with companies we have already met before as they are able to give us an update.

Our Office Building - OCBC Centre

It is increasingly obvious why more and more companies are making Singapore their regional hub.  Recent events in Hong Kong are likely to accelerate that trend.
My highlight was a lively debate with Rusal, the Russian aluminium giant, about market trends.  Aluminium has had a bad rap at least as an investment idea.  Chalco, the Chinese giant, is a Harvard Business School case study in shareholder value destruction, while Rusal’s IPO on the Hong Kong Stock Exchange, the first Russian company to list there, has not been a happy experience.  Still one does feel that things are turning.  Surprisingly some of the major players, Rusal included, have shown supply side discipline by mothballing expensive and inefficient plants, and shifting the cost curve down by at least 10%; and at a time when demand for aluminium continues to grow everywhere, notably of course in China.
Most people are probably unaware of just how widespread usage of aluminium is.  Combine that with some artificial supply side induced shortages largely as a result of the Indonesian ban implemented in January this year on the export of raw bauxite, and outside of China premiums over spot prices have gapped up dramatically this year while the large physical stocks in warehouses have been reduced by what looks like at least 25% with a massive backlog of withdrawal requests.
Inside China, things are more complicated.  Demand has continued to grow but so has supply in low cost power locations in the west (though high cost for transport when delivering one tonne of product to users on the east coast; effectively the material has to travel 9,000 km!).  For the record we are invested in China Hongqiao, the number 2 by capacity in the country but number 1 in molten aluminium an altogether different product with much better system economics that places it in the bottom decile of global cost, while delivering a product that also lowers its customer’s costs and creating a competitive bubble of a 50 km radius that is effectively as far as you can service without doing damage to the material.  Pricing in China is less robust but seems to be on the way back.  As do the share prices of all players in the industry as they have come off the bottom though still sit a long way below historical highs.
Rusal thinks things are only going to get better.  Of course they have a partisan point of view but the evidence does seem to be leaning their way and they did call the turn early.  Ford is launching a new line of SUVs that contain a great deal more aluminium.  This makes vehicles lighter and more fuel efficient.  Timing is perhaps unfortunate with rapidly falling oil prices; but the advantages persist and it is a greener and more environmentally friendly product.  The industry is watching the consumer reaction.  The potential increase in demand for aluminium could be material if this car category is successful.  You learn all about this sitting in Singapore talking to a Russian company.  




An interesting conversation with one of China’s leading auto retailers surfaced the surprising resilience of Japanese brands in terms of consumer sentiment.  The dealer space is changing rapidly with increasing emphasis on service and collateral products like car finance and insurance.  The sector is rapidly reflecting the US/UK model.