Short Position: It's more gas for Gas Malaysia

  • Markets
  • Saturday, 28 Dec 2019

As for CPO, it is at a one-year high of RM2,883 per tonne. This is the highest for CPO since hitting RM3,316 per tonne in Feb 2017. It has lifted the fortunes of plantation stocks, which have been languishing since 2018.

It’s more gas for Gas Malaysia

Gas Malaysia Bhd is finally being more than just a distributor of gas through pipelines to households and industries.

In its latest announcement, the company said it has received two licences from the Energy Commission. One of it allows Gas Malaysia to ship in gas for it to be delivered through a regasification terminal, transmission pipeline or distribution pipeline to customers.

The second licence is for Gas Malaysia to operate and maintain the distribution pipeline for a period of 20 years.

With the two licences in place, Gas Malaysia is now a complete natural gas supplier to consumers and industries. This role was previously dominated by Petronas Gas, the national oil and gas company.

Although the two licences allow Gas Malaysia to generate additional revenue from shipping and delivering the gas to customers, it does not take away the role of Petronas from being the dominant oil and gas player in the country.

Petronas still controls the gasification terminals through which shippers distribute the gas. And Petronas, with sheer size and volume of trading, should be able to offer consumers better rates than any competitors.

For consumers, it opens up an alternative supply of gas. This is particularly important for industries that rely on gas for their operations.

Under the energy review policy, the government is reducing its subsidy on gas, which inherently causes the price to go up gradually. This is part of an overall management of the government’s finances.

As for Gas Malaysia, the new development signals a lift for its current predictable stream of business. It allows for it to generate revenue from being a shipper as well as a distributor of gas.

The unique thing about the natural gas business is that there is no universal price. The price depends on the distance between the source and the target market because transportation cost is high.

Will the commodity run last?

THE year 2019 has certainly been the year for the revival of commodity-linked stocks fuelled by the resurgent prices of Brent crude and crude palm oil (CPO).

Brent crude is heading towards the US$70-per-barrel mark, which is the price desired by the Organisation of the Petroleum Exporting Countries (Opec). Saudi Arabia-led Opec does not want Brent crude to head to the dizzy heights of US$100 per barrel because it would lead to excessive supply into a slow market.

The demand for oil is not expected to increase much next year due to the expected slowing global economy. Towards this end, economist is already predicting that growth in eurozone will be below 1% next year.

The US, China and the UK are also expected to see slower growth next year. Hence, the forecast for oil is that it would hover around the US$70-per-barrel mark.

As for CPO, it is at a one-year high of RM2,883 per tonne. This is the highest for CPO since hitting RM3,316 per tonne in Feb 2017. It has lifted the fortunes of plantation stocks, which have been languishing since 2018.

Brent crude prices are more stable now compared to a year ago while CPO prices may have more legs. However, any price above RM3,200 for CPO is unlikely to sustain because of the incoming supply.

Weather conditions led to poor productivity from plantations and this has, in turn, led to a short of supply of CPO. However, the weather conditions have improved, which means the bullish run for CPO may be shortened.

Between plantations and oil and gas stocks, the latter seems to be more stable now compared to three years ago. Many of the oil and gas stocks have written down their investments and operating under a rejuvenated balance sheet.

As for plantation stocks, its fortunes will fall when CPO prices take a turn.

Digital banks – game changer?

AS it stands now, commercial banks are facing tough times. Softer demand for loans and a slowing down in corporate activity are hurting banks. The banking sector’s price-to-book valuations have sunk to lows of less than 1 time. Analysts say this is due to the expected lower earnings from banks and subdued returns on equity.

Yesterday, Bloomberg reported that banks around the world are unveiling the biggest round of job cuts in four years as they slash costs to weather a slowing economy and adapt to digital technology.

So who in their right mind would want to go into the banking business today? Answer: those wanting to run digital banks. The thinking is simple – digital banks are meant to do better than traditional banks. Running more efficiently through an aggressive use of technology, these banks have their eyes set on offering products and services at better rates than banks. They are also after the under-banked and the un-banked. They may not only succeed in doing this, but also in robbing existing banks of a lot of their business.

Think of the global tech giants. Imagine if Facebook or Google or Whatsapp offered you banking services. They would have a huge reach and millions of dollars to spend to win over new customers. But the entry of new players brings new risks to the financial landscape. Financial regulators have to deal with the issue of whether to allow digital banks to exist. It is unlikely they have a choice.

The best way is to regulate this space and that is what Bank Negara Malaysia is setting out to do. On Friday, the central bank reiterated its plan to issue up to five digital banks in Malaysia and issued an exposure draft on its licensing framework for this. It said this forms part of the series of measures to enable the innovative application of technology in the financial sector.

The rules are meant to safeguard the integrity and stability of the financial system and depositors’ interests, taking into account that the newbies coming into the space may have not operated in a full financial and economic cycle.

It will be interesting to see what the applicants for these five new licences come up with, considering the strict measures imposed by the rules, especially in light of the heavy capitalisation requirements.

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