Saudi drops WTI oil contract, use Argus Sour Crude Index instead.

From this FT article: "Saudi drops WTI oil contract", Saudi Arabia will use Argus Sour Crude Index instead.

What is this Argus Sour Crude Index ?
I did a search on Argus Media which created the index.
Found this PDF file: Argus Sour Crude Index.

We can see the methodology and specifications from this file (details and examples of calculations are illustrated).

This Argus Sour Crude Index (ASCI) calculation method has some interesting features..

Argus Sour Crude Index (ASCI): daily volume-weighted average of aggregate deals of components grades: Mars, Poseidon, Southern Green Canyon (SGC).
It claims to be "a pricing tool designed to serve primarily buyers and sellers of imported crude that need a broader index of US Gulf coast medium sour crude value for use in long-term contracts".

Argus Sour Crude Index Price = Argus Sour Crude Index Differential + same month WTI Formula Basis

WTI Formula Basis: pricing series by combining Nymex futures (before expiry) and WTI spot prices (after expiry), to represent mean of WTI Cushing spot assessment for 3 business days after expiry which precede pipeline scheduling.

This "normal" calculation method (daily volume-weighted average of aggregate deals of Mars, Poseidon, SGC) is to be used if combined volumes of all 3 grades reach "volume minimum" (6000 barrels per calendar day).

If volume minimum is not reached, then "Proportional Assessment" is to be used.

Proportional Assessment:
Beginning of every trade quarter, Argus will average volume of trade in each of last six trade months and assign each grade a % of traded volume (for example 71% Mars, 22% Poseidon, 7% SGC).
ASCI will be constructed using individual volume-weighted average prices for Mars, Poseidon and SGC using the % (for example 71% Mars, 22% Poseidon, 7% SGC).

To address difficulties associated with "stream disruptions" (output from pipeline ceases, market for that grade becomes illiquid), there is this "Intelligent Assessment".

Intelligent Assessment
If stream disruptions happen (1 grade becomes illiquid), Argus will assesses and decides whether to suspend daily price or continue with Intelligent Assessment.
If trade in remaining 2 grades > volume minimum, index will be calculated from the remaining 2 grades. If remaining 2 grades < volume minimum, then the "proportional assessment" will be applied in the same proportion, using Argus published prices for the grades (actual trade or intelligent assessment). If all streams are very disrupted until integrity of index damaged, Argus will consult with industry to form an alternative index (other sour grades, import values, intelligent assessments).

My summary:
1. ASCI uses both futures and spot price to try to arrive at a better price representation.
2. ASCI uses past volume% to calculate index if current trade volume is low (i.e. illiquid; demand low, supply intact).
3. ASCI calculation takes away grade with stream disrupted (i.e.: illiquid; demand intact, supply disrupted).
4. ASCI is still using WTI, Nymex to arrive at its data. It is still dollar-denominated.
5. ASCI is volume-weighted; uses deal volume when market is normal, uses past volumes when overall market is "illiquid" (volume low). Volume weighted "price" may be more representative than, say, closing price.

Basically, it’s trying to have a better price representation (against fluctuations, manipulations, distortions etc)... We can also guess this from its claim: "a pricing tool designed to serve primarily buyers and sellers of imported crude that need a broader index of US Gulf coast medium sour crude value for use in long-term contracts".

Hamburg Ship Evaluation Standard : a mark-to-model shipping evaluation

Saw this interesting article on Financial Times, titled:
Ship valuation method sparks inflation fears.

It was said that "German shipping banks are expected to follow the lead of HSH Nordbank, the world’s largest shipping bank, and Deutsche Schiffsbank, Germany’s second-largest, which have praised the Hamburg Ship Evaluation Standard and look set to start using it".

It was said that there is a report by PwC, the accountants, endorsing this new standard.
Let’s take a look at what the new evaluation standard is.

Hamburg Ship Evaluation Standard, is devised by Hamburg Shipbrokers’ Association (Vereinigung Hamburger Schiffsmakler und Schiffsagenten, VHSS).

From VHSS’s website, I found this insightful PDF file.

It claims that due to illiquidity in ship sale-and-purchase market, forced sales, charter rate at level of required operating expenses makes traditional method unusable as ship evaluation standard. Therefore, this new Hamburg Ship Evaluation Standard appears, as a tool for "value assessment (Long Term Asset Value, LTAV), beyond short term market fluctuations".

The LTAV is "determined on grounds of vessels long term earnings potential, using present value…. DCF method… incorporate volatility of shipping cycle… conservative, statistically proven… transparent…".

It defines when it is a dysfunctional/irregular market, when 2 of 5 scenarios apply (Refer to PDF for details). The formula to calculate LTAV is also given, basically it is using discounted cashflow, residual value analysis with inputs of charter incomes, operating costs, discount rate, residual value, 20-25 years.

Will other banks that loan to shipping companies, other shipping companies in the world going to change to this mark-to-model method to evaluate fair value of their shipping assets ?

Some more "philosophical" questions:

• We see that a switch from mark-to-market to mark-to-model method has happened on "financial toxic assets" and now on shipping assets, will this trend spreads to other assets ? Where to draw a line ?
• How should investment analysts or investors adjust their investment analysis ?

US anti-dumping, anti-subsidy: US ITC

In recession, there is greater risk that countries will implement protectionism measures.

These protectionism measures may affect industries and companies, and thus our investment.

The anti-dumping, anti-subsidy order seems abrupt in newspaper announcements and often caught investors off-guarded. However, it’s actually not an abrupt event.

United States International Trade Commission (US ITC) and US Department of Commerce are two important entities for conducting anti-dumping (AD) and countervailing duty (CVD) (subsidy) investigations and five-year (sunset) reviews. The relevant stature is the Tariff Act of 1930.

US ITC and US Department of Commerce have different roles.

US ITC: “determines whether the U.S. industry is materially injured or threatened with material injury by reason of the imports under investigation”.

U.S. Department of Commerce: “determines whether the alleged dumping or subsidizing is happening, and if so, the margin of dumping or amount of subsidy”.

If both investigations are affirmative, U.S. Department of Commerce will issue an antidumping duty order to offset the dumping or a countervailing duty order to offset the subsidy.

There is also AD/CVD 5-year (Sunset) Reviews where previous AD/CVD order may remain in place or be revoked.

Besides AD/CVD, there are “Global and Special Safeguard Investigations” concerning global safeguard (escape clause) and market disruption. This is under US ITC. Stature is Trade Act of 1974.

From US ITC’s website, we can get lists of useful information for industry analysis from its “research tools”, for examples recent petition, AD/CVD orders, sunset review status/schedule/disposition.

Antidumping and Countervailing Duty Handbook

is a good guide to learn about how filing of AD/CVD is done.

We can find information on :

• petition process
• investigation process
• review process
• historical overview (information on related laws)

The appendixes (with glossary, timetables, sample report, forms, graphic summary) are insightful for learning about anti-dumping, anti-subsidy order. The graphic summary shows for period of 1985-2005, number of cases, value of imports, disposition (% of affirmative, ITC negative, terminated), top 10 countries cited in AD/CVD cases.

Historical Case Statistics from “research tools” has a more detailed import injury case statistics (1980 – 2006).

Stonehage Affluent Luxury Living Index 2009

Stonehage Affluent Luxury Living Index, or SALLI is an index to measure the inflation experienced by High Net Worth (HNW) and Ultra High Net Worth (UHNW) individuals and families. It’s Sterling-based.

PDF file : SALLI 2009

One key highlight is that SALLI actually falls by an average of 3.7% in 12 months ended on April 09, compared to average inflation rate of 2.3% of UK’s CPI over the same period. This is under the background of significant fall in the value of Sterling against USD and Euro. SALLI deflation will be even greater if not for this reason. In a way, recession affects HNW/UHNW individuals spending. In another way, it’s “cheaper” to live as HNW/UNHW individuals now.

We can take a glimpse of luxury industry through SALLI.

It’s eye-opening to see what the High Net Worth (HNW) and Ultra High Net Worth (UHNW) live on. This can be seen from the component items of SALLI from the pdf file. (Check out the items, the brands etc…)

It’s really an extremely big gap between HNW/UHNW and the masses. :-)

China stimulus package for electronics, logistics, steel and auto industries

From China government’s website, we can find detailed stimulus package for electronics, logistics, steel and auto industries.

This provides a good read about the industries on status quo/current environment, principles/goals for the stimulus package, actions and policies etc..

English version of China government’s website is also available.
However, I can’t find similar English version of industry stimulus package.

Industry Analysis - Research and Markets

Industry analysis is one of the 3 pillars of investment analysis, the other two are company analysis and economic analysis.

Is there any website that we can get a glimpse of these industry reports ?

Recommend:
Research and Market, claimed to be "World’s largest market research resources – 384,777 reports".

The industry reports in this website are not free.
However, tremendous insights can be gained by just looking at the structure of the report.

It usually comes with Description, Table of Contents, Summary, Companies Mentioned.
If you are doing your own industry research, you can learn from the website at least what topics, data and companies you have to look into. It at least sets a benchmark on what your industry report needs to cover.

Another information useful is how much these industry reports cost.

Note: If you like this post, you may like my other posts on industry analysis and
investment resources.

Obama's remarks on American Automotive Industry

US President Barack Obama has issued "Remarks by the President on the American Automotive Industry" on 30 Mar 09. Some PDF files on Warrantee Commitment Program; GM and Chrysler’s Viability Assessment are included in the website too.

The Auto Plan

For any investor, a lot can be learnt from GM and Chrysler’s Viability Assessment. It is like a mix of industry analysis + company analysis.

Some highlights of the Auto Plan that I find interesting: (refer to the website for actual text and details)
1. Has shed over 400,000 auto-related jobs over the past years.

2. It’s not the fault of workers. It’s a failure of leadership – from Washington to Detroit.

3. Plans required hard choices by companies and stakeholders.

4. General Motors (GM) - Rick Wagoner is stepping aside as Chairman and CEO;
adequate working capital over the next 60 days; to produce a better business plan;
United States government has no interest in running GM.

5. Chrysler – potential partner Fiat to transfer its cutting-edge technology; building new fuel-efficient cars and engines; agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before Fiat is allowed to take a majority ownership stake in Chrysler; give Chrysler and Fiat 30 days to reach final agreement, consider lending up to $6 billion

6. Bankruptcy code as a mechanism to help GM & Chrysler restructure quickly.

7. Warrantee of car from Chrysler, GM will be safe: the Warrantee Commitment Program

8. To support demand:

• Recovery Act funds to purchase government cars + other federal fleet purchases.
• Treasury Department's Consumer and Business Lending Initiative + auto finance companies: to increase flow of credits.
• New tax benefit for auto purchases.
• Fleet modernization programs: credit to consumers, turn in less fuel-efficient/old cars and purchase clean cars.

9. New Director of Recovery for Auto Communities and Workers to assist the workers, communities, and regions.

Will the Auto Plan be able to revitalise the US automotive industry ?

OPEC (Organization of the Petroleum Exporting Countries)

OPEC (Organization of the Petroleum Exporting Countries)
website
OPEC website is a great resource for oil-related industry.

I find its publications below very useful:
World oil outlook (annual):
This is a great industry analysis report. It started of with main assumptions.
Oil supply and demand outlook is analysed.
The report also covers oil downstream industry.

OPEC is using OPEC World Energy Model (OWEM) and World Oil Refining Logistic Demand (WORLD) model to analyse the energy industry and oil downstream industry.
The portion "major data source" tells where to get your information if you want to do your own research.
I prefer industry analysis that comes with assumptions, models used and data source/reference.

monthly oil market report (monthly)
Publishing schedule of monthly oil market report is available.

The report highlights many important components related to oil industry:
crude oil price, oil futures, commodity markets, world economy, world oil demand/supply, product markets and refinery, tanker market, oil trade, stock movements etc.

In the future, if we wish to analyse on oil industry, at least these components need to be analysed. The "world economy" portion is also useful for economic analysis, in the point of view of oil industry people.

OPEC bulletin
This OPEC bulletin has write-up on the industry.

The latest of these publications available on date of this post:
World Oil Outlook 2008
link
December monthly oil market report
link
OPEC bulletin (Nov-Dec 2008)
link

Other information that I find useful:
OPEC upstream investment
OPEC downstream capacity
OPEC oil reserves
It is like a "pipeline" – from oil reserves, upstream, then downstream, then to customer.

Energy Information Administration (EIA) - International Energy Outlook 2008

Energy Information Administration (EIA) website is a great resource on energy-related industry.
EIA website

It has a lot of information on different types of energy sources:
petroleum
natural gas
electricity
coal
renewable & alternative fuels
nuclear

"Forecasts & Analyses", "Geography" are very useful too.

International Energy Outlook 2008 (published on September 2008)
link to International Energy Outlook 2008
PDF file:
PDF file

Industry Analysis – treasure hunt using Wikipedia

Though a good insightful industry analysis may not be easy to do,
but even a layman can leapfrog his knowledge in the industry pretty fast
(much like a steep learning curve).

To illustrate the point, imagine I am a layman (I really am) to the palm oil industry and
I know nothing about palm oil except the word "palm oil". :-)

You can try it out yourself to understand my point.
Let's start the "treasure hunt" using Wikipedia.
http://en.wikipedia.org/wiki/Palm_oil

From the Wikipedia’s external links only, we found:
1. Palm Oil HQ: (bingo, hourly updated palm oil industry news, CPO future prices, historical prices)
http://www.palmoilhq.com/

2. oil palm production, consumption, export, import: (bingo, can do supply/demand analysis, can know which are the big producers and users, industry concentration etc..)
http://www.indexmundi.com/en/commodities/agricultural/oil-palm/

3. Greenpeace report (bingo, we know one of the threats to palm oil industry)

From the Wikipedia’s references, we found industry associations like: MPOA, MPOB, MPOPC
search using Google:
1. MPOA (Malaysian Palm Oil Association)
http://www.mpoa.org.my/
which further leads us to RSPO (Roundtable on Sustainable Palm Oil)

2. MPOB (Malaysian Palm Oil Board)
http://mpob.gov.my/
which further leads us to more "links" from its links.

3. MPOPC (Malaysian Palm Oil Promotion Council)
which is showing dead link but found:
MPOC (Malaysian Palm Oil Council)
http://www.mpoc.org.my/main_ind.asp
This is a treasure of palm oil industry data.

Just wonder why the industry bodies are MPOA, MPOB, MPOC respectively, so funny :-)

Industry Analysis - using prospectus

Prospectus has a great amount of information. Any novice can learn a great amount from prospectus.

To illustrate the point,
let say we choose: Sime Darby (listed in Malaysia)
Sime Darby's prospectus

We can find information such as:

• risk factors,
• industry overview,
• business,
• information on substantial shareholders, directors, management,
• financial information

Many are self-explanatory. Some pointers:
1. Pay particular attention to the risk factors
This "risk factor" is a very interesting section.
The company will honestly cover every angle to tell you what can go wrong with the company, as if trying to convince you not to buy shares of the company :-)
With this information, we will know what can affect the company’s performance in the future.
We can get information useful for Porter’s 5 forces analysis (briefly discussed in this post)

2. "Industry overview" and "business" sections. It may provide some data/insights by industry bodies to substantiate some statements. Note down the industry bodies so that we can go to them directly for data in the future.

3. "Information on substantial shareholders, directors, management" is useful to analyse on corporate governance and quality of management.

Industry analysis - industry classifications

Companies can be segregated into different industry classification for ease of discussion and analysis.

Two of the more popular industry classification methods are:
1. Industry Classification Benchmark (ICB) which is developed by Dow Jones and FTSE.
ICB website
PDF file

ICB classification is in the format of :
industry
supersector
sector
subsector.

DJ Indices and FTSE Indices are following ICB classification.

2. Global Industry Classification Standard (GICS) which is developed by Morgan Stanley Capital International (MSCI) and Standard & Poor (S&P).
GICS website

GICS classification is in the format of :
sector
industry group
industry
subindustry.

MSCI Indices and S&P Indices are following GICS classification.
GICS classification comes with code, for example: semiconductor (45205020)

Industry Analysis – get data from MICE

MICE (Meetings, Incentives, Conventions and Exhibition) information is a good source to do Industry Analysis.

Malaysia Convention & Exhibition Directory
website
Look for calendar of events .
It shows a list of events, conventions, exhibitions that have been held and are going to be held.
We can get a lot of information from Industry Exhibition, for e.g

• Industry participants (industry leaders, challengers, numbers of main participants etc.)
• Buyers
• Suppliers
• Industry publications, magazines, newsletters
• Industry groups
• Regulators
• Industry experts
• Talks/seminars (sometimes presentation materials are available)
• Products, niche markets etc…

Take for example, from Calendar of Events,

choose ISF 2008 (17 June – 20 June 2008)
go to ISF website (International Security & Safety Expo & Forum) (click on the logo),
you can get "e-brochure" (can find related Ministry, industry body, lots of industry participants can be found inside).

The logo shows the sponsors (usually important industry players), industry publications etc.

We will be able to get even more information about the industry cluster (to use Michael Porter’s word: "cluster") if we continue to search for the sponsors, industry publications, professional bodies etc.
We have not even set foot on the real Exhibition and already got so much information :-)

Management guru: Michael Porter

Michael Porter’s ideas are greatly useful in investment analysis.
His ideas on Competitive Advantage (of companies, states, countries etc.), Strategy, Clusters are insightful for industry analysis.
(In investment analysis, we normally do: company analysis, industry analysis, economic analysis.)

Magazine "Economist" has an article on Michael Porter:
article on Michael Porter

Institute for Strategy and Competitiveness of Harvard Business School is headed by Michael Porter.
ISC website

It has a great resources (pdf files) on Michael Porter’s past lectures or presentation.
We can see how his method is used to analyse competitiveness of strings of countries, Singapore included. Too bad Malaysia’s report is not included yet.

Look at a sample of how he analyses on competitiveness, clusters, strategy.
competitiveness (e.g Singapore)
Clusters
Strategy

Michael Porter’s consultant firm Monitor:
Monitor's website
Lots of resources on business issues and industries can be found here.

Examples of how Michael Porter’s 5-forces (threat of new entrants, power of suppliers, power of buyers, threats of substitutes, competitive rivalry) can be used in industry analysis can be seen in Investopedia’s Industry Handbook. A few industries are analysed.
Industry Handbook

Enjoy exploring :-)