Pakistan State Oil Co. warrants closer watch

Pakistan’s largest oil marketing company, Pakistan State Oil Company (PSO) is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geopolitical scenario, alongside with rapid depreciation of Pak Rupee, in the near term. I am inclined to share with my readers the latest review by Pakistan’s largest brokerage house, AKD Securities.

The brokerage house after revisiting its investment case for Pakistan State Oil (PSO) has revised December 2023 share target price to PKR215, from PKR240, providing a total return of 66% from last close.

Its models incorporate risk-free rate of 17%, PKR/US$ of 240/270 and Arab Light of US$95/90 per barrel during FY23/FY24. More specifically, with the crop season likely to be impacted by the recent catastrophic floods (affecting HSD offtakes), reduced auto sales in the coming quarters and overall fallen retail sales due to lower affordability amidst higher prices.

Industry’s total POL demand is expected to cumulatively fall by 15% during FY23 (previous estimate 8%), due to an overall depressed economic outlook.

To note, PSO’s volumetric offtakes were down by 18%YoY as against industry’s overall decline of 20% during 5MFY23.

The much awaited revision in OMC margin provides significant impetus to the valuation. The brokerage house has incorporated uniform OMC margins of PKR6/liter for both MS and HSD from January 2023 onwards, up 61%/51% from current levels for MS/HSD, respectively.

The aforementioned increase is expected to result in gross margins for retail fuels to stand at 2.6%/2.5% (assuming current POL prices) from 1.6%/1.7% on MS/HSD, respectively.

Historically, OMC margin increases were done generally benchmarking with the core CPI (NFNE), increasing by 6% on an average, annually. Going forward, the brokerage house assumes an annualized growth in OMC margin by 8%, to be revised at the start of every fiscal year.

With regards to the company’s working capital issues, measures taken by the GoP in order to meet with conditions set out by the IMF may be a breath of fresh air for the company.

As the global lender pushes the GoP into fiscal consolidation by increasing power and natural gas tariffs, this is expected to reduce the financial burden on the cash-starved sector and consequently PSO.

The company may be the primary beneficiary of these hikes as repayments of its overdue receivables and LPS surcharges may begin flowing through from its two biggest defaulters SNGPL (overdue receivables: PKR305 billion) and power sector (overdue receivables: PKR92 billion) as per latest quarter, inducing increased collections from customers.

Ongoing winters may pose  risk because in the near term, the national petroleum company is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geo-political scenario, along with rapid depreciation of PKR/US$.

This subsequently results in increased working capital needs for the company and finance costs (82% short term in foreign currency, rising rates globally pose a risk).

Overall, the brokerage house expects belligerent build up of LNG receivables from Sui companies (as seen in the past) to gradually slowdown/ halt on the back of shrinking tariff differential between indigenous and imported gas assuming biannual gas price increase is incorporated in timely manner going forward.

The brokerage house liking for Pakistan State Oil (PSO) is due to: 1) gas and power tariff adjustments may prove to be cash-positive, 2) Modernization plans in refinery subsidiary (PRL) to enhance productivity, and 3) Phasing out of RFO coupled with increasing share of retail fuels, resulting in stable margins to drive unhampered future cash flow.

Key Event of Maritime Trade in 2022

As year 2022 draws to a close it is pertinent to look back at some of the biggest stories that have been covered by Seatrade Maritime News over the last 12 months. For the readers interest we have chosen six major themes.

Tanker market boom

A geopolitical Black Swan supercharged the tanker market. The risk of a major confrontation between Russia, Europe and the United States completely redefined oil trade. Assessing the impact of a possible oil embargo on Russia is a near impossible task. But undoubtedly global oil trade and prices were severely impacted.

By the end of October it was an extremely different picture. As the cliché goes, the tanker sector was on fire. Charter hires reached stratospheric levels on the back of longer voyages for crude oil and for refined products, as well as small and large gas carriers.

As the latest phase of sanctions against Russian oil exports came into force in early December things continue to look extremely good for the tanker sector.

Impact of war in Ukraine

Much of what caused the boom in the tanker market has been the war in Ukraine, which of course has impacted more than shipping. But the invasion by Russia also left over a thousand seafarers stranded on vessels at Ukrainian ports.

Over the coming months seafarers were gradually evacuated from stranded vessels. However, a blockade of Ukrainian ports quickly started to have a serious impact on global food markets and prices as the country is major exporter of wheat and grain. Over a period of months much work was done to create an international corridor for grain exports from Ukraine with a humanitarian corridor and was up and running by the end of July.

“Inchcape Shipping Services (ISS) reported the ports of Odessa, Chornomorsk and Pivdennyi opened as of July 27. ‘We can expect the first vessel sailing by the end of the week, as it’s critical to release the vessels which are still blocked in ports,’ said ISS. Once blocked vessels are cleared, activity will continue via convoy, accompanied by a lead vessel.”

The humanitarian corridor has continued to provide a vital lifeline for grain exports, on occasion it has been threatened with closure. Meanwhile the war continues to have other impacts on shipping such as the growing dark fleet of tankers aimed at busting sanctions against Russian oil exports.

P&O Ferries mass firing

Switching gears considerably and at the start of 2022 the name Peter Hebblethwaite would have meant little to most, but he was in few short months to hit global headlines. Peter Hebblethwaite is of course the CEO of P&O Ferries who was to be branded Britain’s most hated boss.

The branding of P&O Ferries boss as the most hated was a result of the mass firing of 800 seafarers over Zoom on March 17. “Video circulated online of the moment P&O notified some of its staff by Zoom call that their employment was ending the same day.”

Somewhat ambitiously P&O Ferries had planned to have its fleet back in service with agency crew within seven to ten days of the mass seafarer sackings. However, the return to service of P&O Ferries did not go remotely to plan and by the end of May it was still struggling to get it all its vessels back into service.

On May 26 it was reported the UK Maritime & Coastguard Agency clearing the Pride of Canterbury in a Port State Control inspection. One vessel in the P&O Ferries fleet still needed a Port State Control inspection before it can return to service. The whole fleet of 10 ships required inspection after P&O Ferries sacked 800 of its seafarers without warning by Zoom call on March 17.

The fleet did all get back into service, but the backlash continued and in October Hebblethwaite was forced to drop off a panel at the annual Interferry conference and in November voted the world’s worst boss by the International Trade Union Confederation.

Container shipping mega-profits

Container shipping enjoyed unprecedented earnings in 2021 and 2022 but as this year has progressed it has become clear that this is not going to last. We started out 2022 reporting that analysts Drewry had upped their annual forecast for container shipping’s EBIT in 2021 to US$150 billion to US$190 billion. As 2022 continued the profits reported by lines were to get even more staggering and in August we reported on the results of Maersk in Q2 just as they were hitting their peak.

Maersk reported an underlying EBIT of US$8.9 billion for the second quarter but behind the 15th consecutive quarter of on-year earnings improvements, there were signs of change. Profitability in the group’s ocean segment rose ‘significantly’ compared to Q2 2021, as softening volumes and short-term rates were comfortably offset by higher contract rates.”

The extent of the plunge in container spot rates to come was to take even the most pessimistic by surprise. In mid-October we reported: “In a research note entitled ‘Fast and furious’ HSBC noted spot rates reported by the Shanghai Containerized Freight Index (SCFI) had fallen by 51% since the end of July – a decline of 7.5% per week. It was also highlighted that spot rates were now well below the levels of contract rates entered into at the start of 2022, especially on the Transpacific trade.

“In fact, at this pace of a 7.5% week-on-week decline, spot rates may hit the average spot rates of 2019 by the end of 2022, a level where we expect capacity discipline to meaningfully emerge, especially when rates go below cash costs.”

As spot rates head back down to 2019 levels this is particularly concerning for container lines as they negotiate long term contracts for 2023, and there can be little doubt that earnings will be considerably impacted.

Decarburization in focus

It's hard to talk about 2022 without mentioning decarburization and emissions. The industry’s ambitions, regulation and IMO targets have gone well beyond their traditional realms of the trade press. Watching the mainstream press trying to cover week-long bureaucratic meetings at the lumbering beast that is the IMO is not something we ever expected to see.

While the focus has more often than not been on regulation it is moves the industry itself is taking in terms of investing in alternative fuels that are the single most concrete actions. Over the last year we’ve seen growing traction around ammonia and methanol as a marine fuel, the latter attracting significant ship orders. However, while ships are on order the availability of green fuels is another matter. In July we covered an interesting story on potential source of cheap sustainable methanol.

In a September episode of the Seatrade Maritime Podcast it talked to Chris Chatterton of the Methanol Institute. Amid all the talk on regulation and targets the most significant change is the coming into force of the IMO’s EEXI and CII regulations, latter for carbon intensity proving particularly controversial.

These were covered in depth by correspondent Paul Bartlett in a November In Focus episode and as Paul commented, “The pressure is already on however, as ship-owners and operators should have drawn up new ship energy efficiency management plans (SEEMP by the end of this year.”

The December meeting of the IMO’s Marine Environment Protection Committee (MEPC) saw some long-awaited progress on a revision of the IMO’s GHG strategy. IMO Secretary-General Kitack Lim said at the close of the meeting, “It cannot be stressed enough how crucial it is that we keep the momentum and deliver an ambitious and fair, revised IMO GHG Strategy at MEPC 80 next year.”

The return of live events

Moving into the final topic for year-end review without a doubt 2022 was the year the of the in-person event with a huge bounce back in conferences, exhibitions, seminars and cocktail parties.

Winding back to March and CMA Shipping in Connecticut was one of the first larger gatherings followed Singapore Maritime Week in April although the latter was still restricted to some extent by Covid measures.

But revving it up a whole different level was the return of Posidonia in Greece in June. As noted at the time in monthly Maritime in Minutes podcast, “If anyone had any doubts about the appetite for inputs and events post pandemic Posidonia clearly spelled these, the exhibition halls packed with visitors from around the globe. There were huge traffic jams against the venue. And of course, there were the parties.”

It was quickly nicknamed Partydonia and it wasn’t hard to see why. But there was plenty of serious stuff going on as well including for ourselves at the Seatrade Maritime News with a raft of live event coverage as well as recording episodes podcasts with Stealthgas CEO Harry Vafias and Vassilios Demetriades the Shipping Deputy Minister of the Republic of Cyprus.

September saw the massive SMM event in Hamburg back on the calendar.  The event was hugely well attended and had strong theme of decarburization running across both the exhibition and conference content. Our Europe Editor Gary Howard summed up the whole event in a piece entitled Drowning in Decarburization.  It drowned out every other topic at SMM 2022, but most of the maritime industry still awaits direction.

US sanctions prevent ships from reaching Iran

According to a Reuters report dozens of merchant ships carrying grain and sugar are stuck outside Iranian ports due to payment issues as a result of Western sanctions.

While United States and other Western sanctions technically have exemptions for food and other humanitarian goods, the Reuters report said the impact of the sanctions on Iran’s financial system have created complex and erratic payment arrangements with international companies.

The ships cannot enter Iran due to payment issues. The payment issues have left 40 ships stuck outside Iranian ports, which are estimated to be holding about US$1 billion worth of cargo.

Iran's Ports and Maritime Organization said in a report in November that some 37 ships loaded with 2.2 million tons of goods had not been able to unload due to "documentation and hard currency payment issues at Bandar Imam Khomeini.

Iran is expected to import 5.5 million tons of wheat in the 2022-23 season, down from 8 million in the prior season but still well above normal levels, based on the US Department of Agriculture data.

Alena Douhan, a UN special rapporteur, issued a report in September detailing how the US and other Western sanctions harm Iranians.

She said since US sanctions were reimposed in 2018, food insecurity has soared in Iran, reaching 60% in certain areas.

Douhan said that the sanctions have severely undermined the delivery of medicine and medical goods to Iran.

She said that licenses that are supposed to be issued by the US Office of Foreign Assets Control to ensure exemptions appeared to be ineffective and nearly non-existent.

There’s no sign that US sanctions on Iran will be lifted anytime soon, as video surfaced of President Biden saying the Iran nuclear deal, known as the JCPOA, is dead. 

Since JCPOA talks fell apart in September, the US has increased sanctions on Iran.

BOJ Kuroda dismisses near term chance of exiting easy policy

Haruhiko Kuroda, Governor, Bank of Japan (BOJ) on Monday brushed aside the chance of a near-term exit from ultra-loose monetary policy but voiced hope that intensifying labour shortages will prod firms to raise wages.

Kuroda said the BOJ's decision last week to widen the allowance band around its yield target was aimed at enhancing the effect of its ultra-easy policy, rather than a first step toward withdrawing its massive stimulus program.

"This is definitely not a step toward an exit. The Bank will aim to achieve the price target in a sustainable and stable manner, accompanied by wage increases, by continuing with monetary easing under yield curve control," Kuroda said in a speech delivered to a meeting of business lobby Keidanren.

He also said Japan's average consumer inflation will likely slow below the BOJ's 2% target in the next fiscal year as the effects of soaring import costs dissipate.

But Kuroda said wage growth will likely increase gradually due to intensifying labour shortages and structural changes in Japan's job market, which are leading to higher pay for temporary workers and a rise in the number of permanent workers.

"Labour market conditions in Japan are projected to tighten further, and firms' price- and wage-setting behaviour is also likely to change," Kuroda said.

"In this sense, Japan is approaching a critical juncture in breaking out of a prolonged period of low inflation and low growth," he said.

The strength of wage growth is seen as key to how soon the BOJ could raise its yield curve control (YCC) targets, which are set at -0.1% for short-term interest rates and around 0% for the 10-year bond yield.

The BOJ shocked markets last week with a surprise widening of the band around its 10-year yield target. Kuroda had described the move, which allows long-term rates to rise more, as aimed at easing some of the costs of prolonged stimulus rather than a prelude to a full-fledged policy normalization.

With inflation exceeding its 2% target, however, markets are rife with speculation that the BOJ will raise the yield targets when the dovish governor Kuroda's term ends in April next year.

While more companies are starting to hike prices to pass on higher costs to households, the BOJ must examine whether such changes in corporate price-setting behaviour will take hold as a new norm in Japan, Kuroda said.

The outcome of next year's spring wage negotiations between big companies and unions will also be key to the outlook for wage growth, he said.

Speaking at the same meeting, Prime Minister Fumio Kishida called for business leaders' help in achieving wage growth high enough to compensate households for the rising cost of living.

Japan's core consumer inflation hit a fresh four-decade high of 3.7% in November this year as companies continued to pass on rising costs to households, a sign that price hikes were broadening.

But wages have barely risen for permanent workers, as companies remained cautious about increasing fixed costs amid an uncertain economic outlook.

Making Pakistan-Iran Trade Possible

Pakistan Must Opt for Oil for Food was the title of my first blog posted on June 17, 2012. I am tempted once again to talk about the same, as Pakistan continues to suffer from the worst balance of payment crisis. Iran is not only Pakistan’s next door neighbor but has repeatedly assured its capability to meet Pakistan’s energy demand.

The reason I am raising this issue again is that European Union member countries and India are allowed to import oil and gas from Russia, facing sanctions. If those countries are not barred from buying energy products from a “Sanctions Ridden Country” why can’t Pakistan buy energy products from Iran?

For decades the United States is saying “Iran is busy in producing nuclear warheads”. However, it hasn’t come up with any credible proof. Many critics say it is a hoax call. They remind of the similar allegation against Iraq that was busy in production of weapons of mass destruction.

After United States, withdrew from JOCPA during Donald Trump era, the perception is getting credence that the super power considers Iran a hurdle in creation of its hegemony in the region, the major supplier of crude oil and gas.

There is also growing feeling among Pakistanis that due to the US pressure on the ruling junta the country not only stopped buying crude oil from Iran, but also stopped construction of Iran-Pakistan gas pipeline. The people privy to information also says that even supply of wheat and rice to Iran has been put on hold.

 They refer to Iraq which was allowed to export oil under “oil for food program”.

The US is fully aware that Pakistan’s GDP growth being pegged due to looming energy crisis and the country needs low cost energy products immediately. However, Pakistan is not being allowed crude oil and gas from Iran.

The time has come Pakistan should assert itself and convince the US that buying energy products from Iran bodes well for Pakistan. If India can pay Iran in Rupee, Pakistan should be allowed to buy energy products from Iran against supply of wheat and rice.

 

Airlines cancel thousands of US flights

Airlines canceled nearly 2,700 US flights as of Saturday afternoon after a massive winter storm snarled airport operations around the country, frustrating thousands of holiday travelers, reports Reuters.

There were flight delays within, into or out of the United States totaling about 6,200 as of Saturday afternoon, according to flight tracking website FlightAware, which showed total US flight cancellations at around 2,700.

The cancellations as of Saturday afternoon included over 750 from Southwest Airlines and nearly 500 from Delta Air Lines.

The flight disruptions came as an arctic blast gripped much of the United States on Saturday, causing power outages and car wrecks. Plummeting temperatures were predicted to bring the coldest Christmas Eve on record to several cities from Pennsylvania to Georgia.

Temperatures were forecast to top out on Saturday at just 7 degrees Fahrenheit (minus 13 Celsius) in Pittsburgh, surpassing its previous all-time coldest Christmas Eve high of 13 F, set in 1983, the National Weather Service (NWS) said.

Winter storms have increased in frequency and intensity over the past 70 years, according to the US Global Change Research Program.

This is in part due to climate change, according to the Environmental Defense Fund, because the planet evaporates more water into the atmosphere as it warms, leading to more overall precipitation.

On Friday, US flight cancellations were reported at 5,936, according to FlightAware.

“Increased air traffic volume and winter weather affecting the northern half of the US could still cause delays to holiday travel," the Federal Aviation Administration (FAA) said on Saturday, though travel conditions were expected to improve.

An NBC News affiliate reported that inclement weather canceled over 130 flights as of Saturday morning at the Seattle-Tacoma International Airport. Some passengers told the news outlet they were not notified before coming to the airport.

An ABC News affiliate showed long lines at the Denver International Airport on Saturday morning, where over 150 flights were delayed and nearly 130 were canceled.

Passenger railroad Amtrak canceled dozens of trains through Christmas, disrupting holiday travel for thousands.

 

Indonesia confirms ban on bauxite export

Indonesian President Joko Widodo has confirmed an export ban for bauxite starting in June 2023 to encourage domestic processing of a material used as the main ore source of aluminium.

The resource-rich nation has surprised markets with its commodity exports policies, including brief but controversial bans earlier this year on shipments of palm oil and coal, of which Indonesia is the world's biggest exporter.

It is also among the world's top suppliers of bauxite, with China its key buyer. The timing of Indonesia's ban, however, is in line with its current mining law.

The president said the bauxite ban aimed to replicate Indonesia's success in developing its nickel processing capacity after halting exports of its raw form in January 2020, which enticed foreign investors, mostly from China, to build local smelters.

The measure, which led to a dispute at the World Trade Organization (WTO), also helped boost the value of Indonesia's exports.

"The government will remain consistent in implementing down streaming so the value add can be enjoyed domestically for the country's development and people's welfare," said Widodo, who is popularly known as Jokowi, emphasizing the importance of jobs creation.

China was the biggest importer of Indonesia's bauxite until Jakarta introduced a mineral export ban in 2014, which it lifted in 2017.

According to Wen Xianjun, a former head of the aluminium department at the China Nonferrous Metals Industry Association, Indonesia's 2014 ban prompted China to boost its efforts to develop aluminium resources in Africa instead.

"Compared with then, China's imports of bauxite are more diversified now," Wen said.

China imported 17.8 million tons of Indonesian bauxite in 2021, and 17.98 million tons in the first 11 months of year 2022, about 15.6% of its total imports, according to customs data.

Lately, three-month aluminium futures contract on the London Metal Exchange rose 0.6% at US$2,386.50 a ton, while the most-traded aluminium contract on the Shanghai Futures Exchange was up 0.2% to 18,595 yuan a ton.

The announcement by Indonesia is not expected to have significant impact on prices.

"It won't cause any major supply headwind as Indonesia now only accounts for a relatively small share of China's supply, Guinea and Australia will immediately make up the lost volume (after the ban)," an aluminium trader at a large trading house in China said.

Indonesia has four bauxite processing facilities with 4.3 million tons of alumina output capacity, while more are under construction with collective capacity of nearly 5 million tons, said chief economic minister Airlangga Hartarto.

Indonesia's bauxite reserves are enough for up to 100 years production, he said.

The country's mining law also states exports of other unprocessed minerals such as copper will also be stopped. Jokowi did not specify the timing of shipment bans on the other materials.

He said there was a possibility that legal action could be pursued against Indonesia for banning bauxite exports, but it would not deter him.

The WTO last month ruled in favour of the European Union in a dispute on nickel ore exports, which Indonesia is appealing.