November | 2015 | World Finance

Suppliers and buyers run into difficulties

Posted on November 11, 2015 by Ashton Wenborn

The relationship between big companies and their small suppliers has often been balanced in favour of the larger firm, with long-payment cycles often putting pressure on smaller companies. However, a number of new businesses are harnessing technology to help rebalance the relationship between suppliers and buyers, and dramatically changing the concept of supply chain management.

Financing forms an essential component of all parts of the global supply chain, but for many years a lack of coherent planning has led to inefficient and lengthy payment cycles. In a number of industries, big companies have been accused of holding smaller suppliers to ransom over the way they pay for goods, with terms stacked heavily in their favour.

One industry in particular that has come in for a good deal of criticism is the UK supermarket sector, where huge firms like Tesco have aggressively dictated terms and demanded discounts for bulk orders of goods from their relatively small suppliers. Indeed, earlier this year Tesco was investigated by the Groceries Code Adjudicator for the way apparently threatened to delay payments in order to gain discounts.

However at the same time, these bigger firms have been praised for propping up small suppliers by signing long-term contracts. Tesco, Sainsbury’s, Marks & Spencer, and Waitrose have all been praised for providing industries with long-term and secure contracts to help keep them afloat. For the supermarkets, these contracts might not make all that much financial sense, as they are inflexible.

40%

Of SMEs need more working capital

60%

Of SMEs have struggled to borrow through traditional methods

Certainly, something within the way supply chains are managed needs to change so that suppliers are able to get paid quicker, and aren’t held to ransom by their buyers. Similarly, these buyers should be able to be flexible with the way in which they allocate their money, giving them plenty of scope to react to unforeseen market conditions.

New platforms
One new platform is offering a way for suppliers to get their payments upfront, while bigger companies can get a discount for doing speedier payments. C2FO, launched in 2010 in the US by CEO Sandy Kemper, has established itself as a pioneering firm making it easier for both suppliers and businesses to get credit and meet the demands of the market.

World Finance spoke to C2FO’s London-based Senior Vice President for the EMEA region, Colin Sharp, about how the company is changing the way supply chains are financed. Sharp said that the inspiration behind launching C2FO came from Kemper’s time as a banker, where he saw how businesses had struggled to borrow funds at advantageous rates. “The seeds for this company were planted when our founder, Sandy Kemper, was a banker at a multi-billion dollar bank in the US. Over time he noticed how challenging it was for businesses to borrow money from banks at reasonable rates, even when they had large customers with very favourable borrowing rates.”

According to Sharp, Kemper also discovered that there was a disparity between the returns cash-rich companies were getting, as well as the eligibility for loans of those companies with lesser cash piles. “He also observed that companies with cash wanted better returns and that companies who needed cash had to borrow at higher rates and often did not meet loan qualifications. Like many great business concepts, the idea of C2FO was born of necessity and critical observation of a broken system.”

In order to help change the way supply chains are financed, C2FO has devised a platform that allows for discounts to be offered to buyers in return for earlier payments to suppliers. The platform works by directly connecting buyers and sellers within their own unique marketplace, said Sharp, “to facilitate the acceleration of accounts payable (AP) / receivable (AR) at a discount rate that works for both parties. Buyers can increase EBITDA and gross margin and earn a better return on short-term cash while improving the financial health of their supply chains. Suppliers can take control of their cash flow and strengthen their partnership with the buyer.”

Signing up
The reception to the product has been enthusiastic, with many leading international businesses signing up to manage their supply chains with the company. The company has already secured a number of high-profile clients, including Amazon, Pfizer, Costco Wholesale, and Walgreens. “They define the amount of cash they wish to make available for early payments to their suppliers, and the desired rate of return they seek for making early payment. Suppliers can then request early payment at a rate that is less than their alternative cost of borrowing. The utility-based pricing market lets cash flow freely between companies at the unique rate that works for both.”

Sharp says that although the platform is applicable to all industries, they are seeing the most growth in the retail, industrial, manufacturing, energy, healthcare, technology, telecom and transportation sectors. And enthusiasm for the platform has not only been from these industries, but also big investors too. Union Square Ventures, notable for its backing of tech successes Twitter and Zynga, has backed it, and Kemper has been widely praised for his innovative work by the likes of the World Bank and the US Government.

Simplicity for these systems is key, says Sharp, and C2FO has managed to keep the set-up time relatively short. “Unlike other enterprise software as a service (SAAS) solutions that can take a year or longer to implement, the C2FO technology is enabled with a simple data exchange.”

The advantage of the platform to suppliers is that they will be able to get paid early, allowing them to be less vulnerable to sudden market headwinds. “Suppliers are able to receive early payment of their approved invoices directly from their customers at a rate they control”, said Sharp. “Our ‘name your rate’ market-based approach lets buyers and suppliers discover the early payment rate that works for both parties. Suppliers ultimately have access to the lowest cost of capital to help grow their business.”

In recent years, there has been a significant increase in the need for working capital among small and medium-sized businesses. This is particularly apparent in the UK, according to C2FO, who conducted a survey in July that showed 40 percent of SMEs needed more working capital, and 60 percent of them had struggled to borrow through traditional methods because of the “expensive, inflexible or time-consuming processes involved”.

On the other hand, buyers are able to improve their balance sheets and make money from the supply chain process. “Buyers can improve the financial health of their supply chain while improving their gross margins. Plus it’s a risk-free alternative to investing short-term cash in low-interest bearing options. Only a simple data exchange is needed to allow approved invoices and vendor information to display securely in the C2FO marketplace supplier portal. The C2FO global support team offers turnkey support to activate the market, on-board and service suppliers and optimise the results”, said Sharp.

Eradicating trust issues
In recent years there has been an element of mistrust that has developed between suppliers and their buyers. However, C2FO feel that their platform can get rid of this mistrust by making the whole process of financing more transparent. “C2FO improves relationships between buyers and suppliers by collaborating on cash flow optimisation. When business partners can work together to improve key working capital metrics, at a rate that’s a win for both, there is clear partnership value. Complete transparency between the AR of suppliers and the AP of buyers makes the early payment marketplace model possible.”

While C2FO are not alone in trying to make supply chains more efficient and work for both ends of the spectrum, the company has been one of the most widely adopted platforms in this new tech space. Global accountancy giant KPMG last year signed up the business for a strategic partnership in the UK, while many other big global businesses are using the firm.

However, Sharp welcomes other firms that are also trying to bring about a change within the supply chain management process. “And yet, we don’t expect to do it alone. Today, we are leading the charge but we welcome others who create working capital markets to ensure a strengthened financial system that will impact global gross domestic product through comprehensive liberation of working capital.”

The ambitions for the firm are to continue bringing its services to new markets and sectors around the world. “Our mission is to liberate working capital”, said Sharp. “This will be made possible by expanding our global working capital marketplace and making other marketplaces possible by leveraging our technology. As more companies struggle to access third-party funding, as they find it difficult to access reasonably priced options or they just become tired of the broken system and processes, C2FO is here to help.”

Nuclear isn’t the prime solution to Japan’s economic problems

Posted on November 11, 2015 by Ashton Wenborn

This August just past, an understandably nervous Japanese population watched as the ribbon was cut at the country’s first operational nuclear reactor in two years. Five years on from the Fukushima Daiichi disaster, the industry finally awoke from its semi-permanent slumber – long enough for the government to rethink its anti-nuclear rhetoric – though not long enough for the public to forget. And while dozens of protestors rallied outside the plant, millions more harboured fears of their own about what another tragedy could bring.

Those in favour of the restart have stood fast by the country’s new regulatory regime, dubbed the ‘world’s most stringent regulation standards’ by Japan’s President Shinzo Abe, intent that under this new regulatory framework another meltdown is nigh on impossible. Plants in the here and now must be designed to withstand a tsunami larger than any on record and must come equipped with an off-site power supply, in response to the inadequacies that plagued the Fukushima plant. On top of that, a new independent Nuclear Regulation Authority (NRA) was established in 2012 to address the regulatory shortcomings identified prior to and after the Fukushima incident.

Plants in the here and now must be designed to withstand a tsunami larger than any on record and must come equipped with an off-site power supply

“The restart of Japan’s nuclear reactors are a hugely important step which sets the country firmly on the path to restoring its trade balance [see Fig. 1] and regaining energy independence, as well as reducing emissions”, said Jonathan Cobb, Senior Communication Manager for the World Nuclear Association (WNA). “Much has been done to improve the preparedness of nuclear plants to be able to cope with similar situations and to strengthen the regulatory process, but it is only now, as reactors restart, that the industry will be able to demonstrate to the public that [it deserves] their trust.”

Reclaiming trust
Francis Livens, Professor of Radiochemistry and Research Director at the University of Manchester’s Dalton Nuclear Institute, noted that the restart is a positive thing, not least “because dependency on imported fossil fuels is costly and damages the prospects of Japan reducing carbon emissions”. Speaking on the challenges, he added that the focus should fall on “gaining trust among public and decision makers… Clarifying these relationships, as is happening, should lead to a more robust nuclear safety framework and, over time, that will be vital in rebuilding trust.”

The confidence shared by supporters, however, is at odds with Japan’s majority, who remain resolutely opposed to a restart, irrespective of rising energy bills and the country’s worsening financial complexion. One survey carried out by Asahi Shimbun last year showed that 59 percent of the public were opposed to a restart. Another Kyodo News poll carried out in the lead-up to Sendai’s restart found that 60 percent were opposed to nuclear energy, whereas 31 percent were in favour. A further 12 percent had either no or minimal concerns regarding future accidents, as opposed to 50 percent and 36 percent who shared a fair or high degree of concern, with many of the opinion that phasing out nuclear power before 2030 is the best option.

The reasoning for the administration’s resilience on this point boils down to Japan’s energy deficiencies, in that the country has no fossil fuel reserves to call its own and little in the way of local capacity. Sources at the WNA say the country was having to shell out ¥3.6trn ($30bn) each year for imported fossil fuels over the period when all of Japan’s reactors were shut down. “So the restart should reduce both the deficit caused by the direct cost of imported fuels, but also help Japanese industry through more competitive energy costs”, said Cobb.

Without nuclear, so say proponents, the country will struggle to appease its population and uphold energy security – as is required for an economy of its size and stature. Prior to Fukushima, this was a power source that made up approximately 30 percent of the national energy mix, and the decision to shutter all 54 of its reactors has exerted undue pressure on what is essentially an energy-poor, energy hungry nation.

“The two largest challenges to the prospect for continued use of nuclear energy in Japan are the issue of public confidence in the nation’s nuclear governance and nuclear safety, and the power sector liberalisation, which will very likely put the economics of building new reactors and maintaining the existing reactors under enormous pressure as many utilities become uncertain about their market competitiveness in the liberalised landscape”, said Jane Nakano, Senior Fellow of the Energy and National Security programme at the Centre for Strategic and International Studies.

In the wake of Fukushima, plans for nuclear – not long ago on course to feed 40 percent of the country’s consumption habits by 2017 – have unravelled and Japan’s reliance on imports in the years since has shown itself to be a costly and unsustainable endeavour.

Righting the imbalance
Near on 90 percent of Japan’s energy requirements are satisfied by imports, and a return to nuclear, according to supporters, would mean a more balanced energy strategy for a country with little in the way of home-grown reserves. Coal, oil and LNG account for approximately 90 percent of the country’s energy mix, and the reintroduction of nuclear would not only hand Japan a dose of independence but a better shot at keeping to its emissions targets.

This dependency on imported energy has cost the country dear, irrespective of a climate wherein low oil and gas prices have spared the country billions of dollars in financial hurt. Japan’s trade deficit last year swelled to its widest on record after the Ministry of Finance slapped a monumental price tag on the country’s new energy strategy, reporting a $27.3bn shortfall, and many have been quick point out a strong correlation between the shutdown and a string of monthly deficits.

Fearing that the country’s stagnant export model and depreciating yen could exacerbate the situation, the Ministry of Economy, Trade and Industry (METI) has set out a new outlook for Japan’s energy market to arrest the situation.

Going by the recommendations, nuclear energy will account for 20 to 22 percent of the country’s power generation by 2030, whereas 22 to 24 percent will stem from renewable sources, each handing a greater measure of independence to Japan and chipping away at the oil and gas market. Speaking to Kyodo news about the country’s energy policy, Fatih Birol, Executive Director of the IEA, said, “I believe Japan without nuclear energy will face major challenges.” He later added, “This plan provides a good prospect for nuclear power, and I believe nuclear power has an important role to play in Japan for the prosperity, cleanness and also the security of the country.”

Going by the Ministry of Finance’s data, Japan’s trade deficit arrived shortly after the nuclear shutdown took hold, and has failed to return back into the black ever since. However, the assertion that Japan’s trade balance has suffered solely because of this incident is far too simplistic an assumption, and there are larger, structural issues afoot here that have a far greater bearing on Japan’s trade balance. Currency losses coupled with volatility in the oil market have contributed greatly to the rot, ahead of the nuclear shutdown, and those of the opinion that a return to nuclear will spell an end to the deficit are sadly mistaken.

“Returning to the same levels as prior to Fukushima would certainly address the trade deficit even if there is a recovery in commodity prices”, said Ali Izadi, Head of Japan at Bloomberg New Energy Finance. “However our base-case scenario forecasts restarts peaking out at half the pre-Fukushima level, which would be barely sufficient to address the trade deficit even if commodity prices remain at current price levels.”

Inevitable energy price increase
Factor in the additional costs imposed by the new regulatory framework and the influence of a nuclear restart may only be marginal at best. As many as 24 operators are pending approval from the NRA, which, even if it were to happen, would succeed only in taking the edge off rising energy prices and reducing the deficit by a modest amount.

“Nuclear energy only made up 30 percent of all electricity generation before the shutdown. With several reactors having been decommissioned since the 2011 disaster, no more than half of the capacity that existed then is set to come back online. All in all, we estimate that the reduction in the import bill would be no more than ¥0.7tn (0.1 percent of GDP) even if another 24 reactors resumed operations”, confirmed Marcel Thieliant, Japan Economist at Capital Economics.

“What’s more, the immediate reduction in the energy import bill due to the nuclear restart may well be offset by higher consumption as some of the electricity-savings measures adopted in recent years are unwound. After all, electricity consumption has fallen by nearly 15 percent relative to economic activity since 2011.” Add to that the inevitable backlash to each and every restart in the pipeline, and it begs the question of why exactly Abe’s administration would favour nuclear ahead of say doubling down on renewables.

Last year alone, Japan installed solar capacity equivalent to that of 10 nuclear reactors and contributed some to the continent’s new status as the world’s fastest growing market for solar power. And while it’s true the targets for renewables – in terms of their percentage share of the overall – are greater than nuclear, there is disappointment still that the plans stop where they do. Taking into consideration Japan’s formidable solar and wind sector, there is a note of disappointment that policymakers have opted not to take this further.

Missed opportunities aside, it’s likely that a nuclear restart will reduce electricity bills and narrow the deficit, if only by a modest sum. What’s not so certain, however, is whether the ends justify the means, and questions remain over whether an energy source opposed by the majority is the better option ahead of renewables. The opposition to nuclear is overblown perhaps, though so too is its credentials in righting Japan’s economic imbalance.

US Democrats cite new concerns over Dodd-Frank

Posted on November 11, 2015November 18, 2015 by Ashton Wenborn

After the rollback of parts of the Dodd-Frank Act in December 2014, US banks have exposed themselves to risking derivative swap trades, according to US Democratic Senators. On Tuesday November 10, Elizabeth Warren, a Democratic Senator from Massachusetts, claimed that $10tn of those contracts remained on banks’ books, in a letter sent to financial regulators.

Warren called upon financial regulatory authorities to exercise their power to mitigate any risks that may arise

The Dodd-Frank Act is a large and ongoing piece of legislation, passed by President Obama in 2010, in response to the 2008 financial crisis. The reform is composed of thousands of pages and numerous provisions, which are intended to be introduced on an ongoing basis over a number of years.

The act had been subject to a number of challenges, primarily from Republican lawmakers, claiming it was overbearing and stifling to financial institutions. In December 2014, a new law effectively cancelled out parts of the act. As Forbes reported at the time, the partial roll back of one particular section of the Dodd-Frank Act will allow “big banks once again to use insured deposits and other taxpayer subsidies and guarantees to gamble in the derivatives markets – the very type of business that drove the 2008 financial crisis and the economic devastation that followed.”

As a result, rather than pushing such swaps off their books, banks have been able to expand them. This, according to Democratic lawmakers in the US, puts financial institutions and the whole economy in danger once again. In her letter, Warren called upon financial regulatory authorities to exercise their power to mitigate any risks that may arise.

International Turnkey Systems on securing compliance solutions

Posted on November 10, 2015February 19, 2016 by Ashton Wenborn

Beginning with the first Islamic Bank in Egypt in 1963 (see Fig. 1), Islamic finance has evolved over the past decades to become a vital sector in the banking industry and an economic driving force in the Middle East. The Islamic Development Bank (IDB) was founded in 1975 in order to encourage the economic development of member states and Muslim communities in accordance with sharia law. The IDB began participating in equity capital loans and grants to fund crucial infrastructure projects across the region, and now has 56 countries as members.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was created in 1990 to monitor and advise on the standards for Islamic banks and institutions around the world. While in 2002 in Malaysia, the Islamic Financial Services Board was established to further enhance stability in the industry and introduced regulations for compliance with Basel II for Islamic institutions in 2005.

Islamic banking continues to go from strength to strength around the world and is expected to experience further growth in the coming years. The Islamic Finance Advisory and Assurance Services (IFAAS) forecast the asset value of the sector to reach $3.24trn by 2020. World Finance had the opportunity to speak with Nasr Albikawi, CEO of International Turnkey Systems (ITS), about the new age in Islamic banking, and what role his company has to play its progression.

Information technology plays a very important role in the financial sector due to the volume of transactions and processes, which is large enough that organisations cannot handle it manually

Technological progress
Information technology plays a very important role in the financial sector due to the volume of transactions and processes, which is large enough that organisations cannot handle it manually – and Islamic finance is no exception. The evolution and development of technology has established new standards regarding the quality and availability of services at all levels, from banking internal processes to delivery channels, and from automating daily operations to tactical and strategic decision support. Ignoring such standards may cause organisations to lose tremendous amounts of money and resources. “Successful institutions know this fact all too well and pay great attention to empowering their business models through modern technology, which in turn yields more focus on business value”, said Albikawi.

Islamic finance is based on the principles established by sharia law, as well as rulings and interpretations issued by qualified Muslim scholars on sharia boards. Accordingly, financial institutions are faced with several challenges related to the implementation of these interpretations in day-to-day banking operations, as well as in product development and commercialisation. Moreover, global banks operating in multiple territories must contend with different interpretations of sharia, which means that they must comply with a wide set of regulations and maintain adaptable operations across subsidiaries and branches.

To help manage this challenge, ITS has created ETHIX Finance, a quick and easy configuration of Islamic finance products that can meet constantly changing market demand. “It also responds to the diverse sharia rulings that vary in regards to the geographical and ideological disparity of Muslim populations, as it was designed with high agility in mind”, said Albikawi. “Financial institutions can structure sharia-compliant products using our product definition engine, which can customise their operational-based transactions, user-defined and sharia-based steps through a ‘Workflow Engine’”, Albikawi explained. ETHIX Finance also enables clients to utilise a varied set of flexible parameters, which allows smooth implementation and the on-going maintenance of sharia interpretations. In addition, the engine provides information about policies and procedures, annual releases and conformance to new regulations in sharia.

Faced with the challenge of reducing cost, improving customer service and enhancing profitability, financial service providers need to implement strategies that achieve operational excellence and provide maximum value. “At ITS, we believe that technological operations can act as a business enabler for the financial services industry to maximise return on investment, while minimising operating costs and optimising the service provided”, said Albikawi. With these goals in mind, ETHIX Finance provides the groundwork for financial services through the utilisation of SOA-based architecture, business mechanisms and STP, together with the high configurability of a workflow engine.

ETHIX technology
ITS has a number of other modules that also assist Islamic institutions to meet changing consumer demands, while still complying with sharia law. The company’s ETHIX Core Banking system is at the heart of their proposed solutions. ETHIX client managers oversee the customer’s comprehensive information records and provide a platform for relationship management, while in ETHIX Accounts managers sort the customer’s deposit, checking, saving, and financing accounts, as well as fixed deposits.

ETHIX Branch is a unifying multi-channel delivery suite composed of reusable software modules, which can be used independently or in combination. The ETHIX Branch suite includes account opening and servicing accounts, teller business stations and safe lockers. “We also offer the ETHIX Finance Islamic Loan module, which provides a comprehensive range of functionalities to undertake retail and corporate based business transactions in a sharia-compliant manner. This includes processing a deal that contains more than one asset, and is financed using several Islamic instruments. Then there is ETHIX Credit, a front-end system for conventional loan creation and servicing, which was the outcome of years of collaborative effort and experience in the field of lending”, Albikawi explained.

Another vital service provided by ITS is the ETHIX-Trade module, which manages trade-related instrument processing, and connects a bank to the SWIFT and Telex networks. This module also provides a crucial link between the bank and its customers, and manages various instruments, such as documentary credits, presentations, standbys, bills of exchange and collections. In addition, ETHIX-Trade deals with guarantees, payments and settlements, financing and sub-instruments. The ETHIX PCD module enables a bank to fully automate the process of calculating and distributing profit to all liability accounts based on sharia rules.

ETHIX Treasury provides leading edge automation of treasury management operations; its integrated multi-user system allows the administration of all treasury financial products. It covers a whole range of modules to address the spectrum of treasury requirements, including a money market module, equity, coupon securities (sukuks), discounted securities, foreign exchange and commodities. Then there is ETHIX Sukuk, a comprehensive and highly adaptable solution that enables a bank to manage the full cycle of issuing and trading bonds. Finally, there is the ETHIX Provisioning module, which is an advanced and fully parameterised module that allows the bank to automate the process of calculating bad debts and posting them against the respective P&L accounts. “Additionally, we are currently developing an a highly customisable and well integrated module with Portfolio Management, Investment Management, Fund Management and Direct Investment”, added Albikawi.

History of Islamic finance

Flexible solutions
Reducing the learning curve helps to encourage employee productivity considerably. “With this in mind, ITS created an IT solution that could meet such challenges. The ETHIX Financial Solution is revolutionary in that it is extremely flexible, easy to use, adaptable and user configurable. It also allows organisations to innovate and focus on creating new products and services that bring them to market very quickly. In fact, ‘short time to market’ and ‘low cost of ownership’ were two primary criteria in the design of ETHIX Financial Solution”, Albikawi said.

The secure and flexible ETHIX suite of financial services was created to form the core of banking technology for financial institutions, boost their operational and growth capabilities and enable them to offer new customer centric solutions in the spirit of sharia-compliance. By investing in a new finance technology solution, banks can significantly reduce their operational costs as ETHIX consolidates all of their services under one unified system.

Moreover, by having more control as well as a more streamlined process across its entire business, banks are able to achieve greater efficiency, speed up product development and create a stronger and more valuable experience for their customers. This sharia-compliant ETHIX solution is therefore designed to help financial institutions reach operational excellence, accommodate growth and achieve cost leadership.

“Over the years, our customers across the globe have come to know ETHIX products as the best sharia-compliant solutions. ETHIX functions paved the way for banks to convert from legacy systems to multi-channelled cutting-edge solutions, and from conventional to Islamic systems”, Albikawi concluded. Examples of institutions that have undergone such drastic transformations include Kuwait International Bank and Libya’s Gomhoria Bank. Further illustrating the position of ITS in the financial industry are the multiple regional and global awards it has received in recent years.

ITS has received the Most Outstanding IT Company for Islamic Finance from KLIFF, the Best Islamic Finance Technology accolade from the Global Islamic Finance Awards and the Best Technology Innovation award, as well as the best Islamic Banking System by the IBS Journal in 2014. ITS is certified with CMMI 5, ISO 9001: 2008, TickIT standards and Information Security (ISO/IEC 27001:2005), and has had references from Garner, Celent and Forrester.

NN Hellas finds opportunities in Greece, despite economic difficulties

Posted on November 10, 2015 by Ashton Wenborn

Economic growth in Greece has remained weak in 2015. In addition to this, the recent capital controls imposed by the Greek Government have not only intensified the worries of customers, but of companies too, resulting in a major shift in consumer habits.

Essential structural changes and a stable economic environment are required so that the Greek economy can jump-start again, leading to the return of business confidence and the recovery of investments – something that is far easier said than done.

The political and financial developments that have occurred over the last few years have significantly shrunk the disposable income of the Greek citizens, forcing many to reevaluate their priorities, with many seeing insurance as surplus to requirements.

In fact, there has been a considerable rise in contract cancellations across all areas of the Greek insurance market. Despite the less than favourable conditions, NN Hellas has managed not only to hold its ground in such difficult times, but managed to significantly increase both its market share and its customer base by offering innovative solutions and improved services.

Solvency II will mean the end of traditional guaranteed pension products, as we have known them so far

Environmental changes
Another major challenge for the coming years is the introduction of new EU control regulations (Solvency II). In response, NN Hellas has been working tirelessly, so that the implementation of the new rules does not impact its business or its customers.

“Just to provide you with an example; Solvency II will mean the end of traditional guaranteed pension products, as we have known them so far”, explained CEO of NN Hellas, Luis Miguel Gomez. “This new regulatory environment will have a significant impact on all aspects of our business, from new product development to operations and risk management.

“It also creates opportunities, as customers increasingly focus on profitable investments to cover their future income, as well as reliable long-term sustainable health products to cover the insufficient benefits provided by the public system.”

NN Hellas clearly sees a challenge as an opportunity to be capitalised on. That is why it is working hard on developing and launching a new direct channel, which will give it the chance to offer its customers an alternative means of accessing its innovative products and services.

The outlet will help the insurer to reach a larger portion of the market and offer new and existing customers greater choice in how they communicate with their insurance provider.

“At the same time we have developed with Piraeus Bank, our strategic partner, a new state of the art range of savings and insurance products, combining guarantees, flexibility and high potential upside for our common customers”, said Gomez. “To carry out all these initiatives, we have been creating a permanent flow of new jobs, of which we are very proud, given the dramatically high unemployment rate in the country.

“Simultaneously, our tied agents base is also growing nicely, fulfilling our aspiration of attracting top talent from the market and maintaining our position as one of the best places to work in Greece.”

Product diversification
NN Hellas has taken massive strides towards enriching its long-term investment product line. Its latest addition is an innovative regular premium programme that combines three key features: capital guarantee, flexibility in premium payment, and profit potential through exposure to financial markets. Clients have already demonstrated exceptional interest in this new offering, both through the insurer’s tied agents and the branches of Piraeus Bank.

Looking forward, the insurer plans to capitalise on this newly built infrastructure and grow its family of CPPI-based products. After assessing market trends, Gomez is convinced that combining return potential with hard guarantees will reap rewards for the company, and its customers.

NN Hellas has been operating in Greece for more than 35 years and it has made significant contributions to the country’s GDP in many ways, be it via tax and social insurance contributions, or the creation of thousands of job opportunities throughout its business. A big part of the insurer’s success has been its ability to stay true to its roots and always put the client first.

“Our mission for the future is simple”, said Gomez. “We are here to help our customers secure their financial futures. We are clear, we care, we commit. We will continue developing innovative and transparent products and services and we are introducing new distribution channels so that we can be where our customers want us to be.”

And by putting this at the forefront of their business, NN Hellas has a strategy that will ensure a positive future for itself, along with assisting Greece to return to its economic prosperity.

The bearish Fed must listen to investors

Posted on November 10, 2015 by Ashton Wenborn

The role of US central bankers has become so much more than it once was. In a past life, all they had to worry about was balancing a steady rate of inflation, once in a while bringing out the bellows to fan markets along. Every now and then in the odd economic cycle they would consider how their actions would influence foreign stock and bond appetite after they’d dealt with getting their own house in order.

The global economy was, for the main part, an afterthought, a sub-narrative to establishing and reaffirming a monetary policy. And then Alan Greenspan started to become infatuated with global petroleum prices, and the persona of those directing policy started to change. Since then, the responsibility for a number of economies has sat with the Federal Reserve, which has given less support for the investor community. It’s a global world, as we all say.

The announcement after the Fed’s meeting on US interest rates in September was the single most important decision to influence international affairs this year

Swatting up
In their latest announcements Janet Yellen and Stanley Fisher said outright that they’d be studying emerging and other market metrics before considering their own domestic reality. We’ll push, they said, but only after we’ve got the nudge from abroad. The most interesting non-conclusion to have come from the September meeting was that if there were an interest rate hike, it would be measured and made in response to economic numbers.

US domestic growth has been an international concern for decades of course, but until this latest announcement it was the driving force behind financial markets and the confidence therein. Now it seems the Federal Reserve has decided to willingly succumb to a role reversal, awaiting instructions from abroad. Arguably the announcement after the Fed’s meeting on US interest rates in September was the single most important decision to influence international affairs this year.

Economists and central bankers in emerging markets and developed economies sat braced, compass in hand and leering over Phillips curves, awaiting the news that would shock the world. Domestically, government bonds rallied, and the dollar dipped temporarily. Externally, the news couldn’t have been better. It’s the domestic investment community that has been let down the most, given the rationale for normalising rates.

One of the unintended consequences of US quantitative easing is that it funnelled a large chunk of credit creation into emerging markets, where the carry trade spun quite a bit of wealth. There has been such an explosion of credit, in fact, that emerging markets account for about 50 percent of global growth and about 80 percent of credit creation. As the US starts to bring that back within the domestic economy when money rates resettle, this is when damage can be expected to be done to those emerging countries. Delaying further is simply delaying the inevitable. Further, the longer rates are held the more likely they will go up, which is the natural conclusion among the global financial community.

The investment community tutted in shame as Yellen discussed trend growth at only two percent, as the more bullish sentiment that currently drives the analytical community nods to S&P breaching 22,000 points, and corporate earnings growth of around four percent over the next 12 months. Who would you rather believe?

Sitting on the fence breaks it
Of course such matters that feed into grand consequences are not to be taken lightly, and demand big shoulders of those who commit to them. So significant are they in fact that Yellen and the Fed have decided to sit on the fence. In essence, the economy is in charge of money rates. In the meantime, investors can run around like headless chickens. It’s quite the daring statement had Yellen not decided to fudge the issue by saying that she hopes to raise rates before the year is out.

While the succumbing of the Fed to economic behaviour feels something of a cop out, of course borrowers responded quite gleefully – at least for the near term. It’s a shame that borrowers who need to avidly study interest rate decisions are those less likely to want to borrow more, making the buoyancy on the supply side less likely to convert into anything distinctly positive.

The decision was taken in light of seriously stunted growth in emerging markets. Investors have grown a little wary of markets in much of South America and parts of Asia and interest in bonds has fallen through the floor, leading to a situation that needs to be protected. Granted, we still have rapid excess debt that hasn’t been adequately addressed.

The Fed needs to show confidence in the US economy. While the recovery is fragile and a sudden face wind could immediately derail progress, it’s time the country’s bankers show a clear and determined agenda. This is going to put the breaks on emerging market growth and might even set a few economies into long-term systemic slowdown, but not raising interest rates is simply delaying the inevitable.

Time will tell
Domestically, central bankers need to get behind the finance community that drive the investment multiplier and focus on encouraging the green shots in the jobs market. Governments and private institutions everywhere still struggle with recapitalisation, austerity measures and regulatory clarity.

And yet we do have far stronger financial establishments. Look at how far Wells Fargo has come, or the structure and capabilities Goldman Sachs has given itself. Both companies are capable of making far more money for shareholders than in previous cycles, and it’s going to become more and more difficult for central bankers to keep the shackles in place.
There will be much to appraise in the December meeting. With assertions of inflation and overheating in some markets – such as real estate – there’s still continued deflationary expectation in global trade markets. Following a battering by the Fed, US stock futures started to look for clarity. The time to give them this is sooner rather than later. The world will follow.

Hungarian Post Life Insurance caters to neglected customers

Posted on November 10, 2015 by Ashton Wenborn

Over the last couple of years the Hungarian insurance market has undergone numerous changes, particularly with regards to how it is regulated. Not only has the previous regulatory body – the Hungarian Financial Supervisory Authority – been abolished and its powers granted to the National Bank of Hungary, but an insurance premium tax was implemented a little over two years ago too. While the changes have posed a challenge to insurers operating in the country, the industry as a whole is in good health and is working to harmonise its practices and laws with those outlined in the relevant EU directives, in particular Solvency II.

More recently, the Hungarian insurance market has seen the number of contracts in both the life and non-life business lines increase considerably. In fact, data released by the National Bank of Hungary shows a rapid rise in the number of people taking out pension insurance. If this trend continues, it could provide the necessary momentum the market needs, as retirement savings help to create more stable portfolios, which is good news for both customers and insurers, as it helps drive down premiums across the board.

One Hungarian insurer that is heavily focused on delivering insurance contracts at the lowest premium possible is Hungarian Post Life Insurance. The company works tirelessly, devoting much of its energy to attracting new customers that were once neglected by the industry. In such uncertain economic times, the insurer sees the rise in the number of people willing to accept the importance of self-provision and make long-term commitments as an indicator of growing market stability. World Finance spoke with Anett Pandurics, CEO of the Hungarian Post Life Insurance Company to find out how the insurance market is evolving, and what the company is doing to stay one step ahead of its competitors.

What are the biggest opportunities and challenges of the insurance market in Hungary today?
The increasing popularity of pension insurance has given a new momentum to the market, and we must admit that having a level playing field has had an important role in the reversal of market trends. The possibility of receiving tax benefits for pension insurance could be a major driver in the market. We should not forget that in the last year when a non-restricted tax benefit could be obtained on life insurance, 800,000 people – almost 20 percent of all the working-age population – took advantage of this option in the Hungarian market. Obviously, this new opportunity imposes more stringent conditions than before. Nevertheless, we have the insight – now markedly reflected in every opinion poll – that the state pension will not be capable of ensuring a carefree old age to the current working population in itself, supplementary pension schemes should play a larger role, to ensure the living standard we all aim for.

Naturally, it is a serious challenge to figure out the opportunities we can provide to our customers in the current interest environment on the savings side. Since Hungarian customers are used to the former high inflation, they do not find yields of one, two, or three percent very attractive. However, in real terms these yields can be higher than the two-digit nominal returns of former years.

How do the regulations determine the continuous development of this sector? What are the most significant regulatory changes?
Regulations could determine market movements fundamentally. It could significantly redefine the lives of the insurers that the past decade has clearly changed the role of consumer protection, as a direct consequence of the financial crisis of 2008. The intention of interference by the regulatory agencies is now more powerful, since the experiences of the former period shows that if the competitive forces are given too much freedom, it may give rise to solutions that could even run contrary to the intentions of the regulatory agencies. We must exercise self-criticism and acknowledge that in this field the responsibility of the insurers were also significant in the past.

The duty of the industry is that while showing proactive cooperation – since fair competition is in our interest as well – with the help of professional arguments that any proposals for overregulation might result in unintended and harmful possible consequences. I believe that an excellent result of this approach and joint effort is the regulation of the total cost indicator (TKM) of pension insurance, where, by means of combining the self-regulating concepts of the market and the intentions of the supervisory authority and consumer protection, a solution that is capable of increasing the trust of the customer was provided, which helps insurers to obtain new contracts.

The regulatory agencies could rest assured that the tax benefit granted by the state will, in fact, increase the wealth of the customer and support their old-age security. The Association of Hungarian Insurance Companies (MABISZ) agrees, and volunteers as a partner in the efforts of the Hungarian National Bank to extend the TKM regulation to the entire sector of life insurance on the basis of the TKM figure of pension insurance.

What accomplishment are you proud of?
We are glad to report that the positive trend of our market growth, which we have been experiencing for more than a decade, continues. Last year, our premium revenues exceeded HUF 63bn ($225.7m), which earned us second place in the Hungarian life insurance market with a market share of 14 percent, according to the MABISZ (Association of Hungarian Insurance Companies). The outstanding accomplishment of life insurance was driven by the significant growth in the scope of single premium products (+24.9 percent), which made us the leaders of the single premium products market at the end of 2014.

Furthermore, it shows the excellent performance of the regular premium life insurance products compared to 2013, as the annual increase of our gross written premiums from regular premium products has been 31 percent, while during that time the market only grew by a mere 3.5 percent. If we consider the results of the first half of 2015, then we can say that our market share has not changed compared to the closing numbers of the previous year.

On January 2 2014, we expanded our life insurance portfolio with our new pension insurance product qualifying for a tax benefit, which helped us to enter the market first, ahead of our competitors. Since its launch, almost 7,000 customers have chosen our pension insurance.

After a series of joint planning and development measures, we participated in the customer loyalty programme of the Hungarian Post since the very beginning. Within the framework of the programme, customers with a loyalty card can collect points on the premiums paid on insurance products, and they are offered a discount when they take out an insurance policy. From 2015, when an insurance policy is taken out customers are also able to redeem their loyalty points. The popularity of the programme is supported by the fact that 200,000 customers have obtained their cards.

It is an outstanding accomplishment of our sponsoring activity that we are privileged to be a gold-level supporter of the Hungarian Olympic Committee, and thus, we can contribute to the safe and peaceful preparation of Hungarian athletes for the Olympic Games to be held next year in Rio.

How is customer satisfaction enhanced?
Since the introduction of our pension insurance product in January 2014, we have been giving a welcome call to each customer to ask him or her about their experiences related to contract conclusion. Of the customers that gave feedback, 99 percent was favourable in the course of telephone conversations, and they were satisfied with the product and the experiences they gained during the sales process, as well as with the information they received.

Last year we also introduced the so-called Key Information Document (KID) for every product in our portfolio, for the purpose of providing a brief presentation of the most important features of the given insurance product, providing useful information to our customers prior to contract conclusion. The concise summary of a few pages contains all the important features of the products, in a simple, clear and easily understandable form.

Why is it important for the insurance market to make companies pay special attention to customer satisfaction?
After the financial crisis Hungary found itself in a fragile, distrustful world, with a severe drop in purchasing power. In order to earn the trust of the people again, it is very important that customers realise that not only the regulatory agencies, but also the market itself and the insurer they have chosen for their partner does its best to provide them with sufficient information to be considered in making a decision.

This is why it is important to repeat from time to time that, for example the TKM regulation started off as a self-regulating effort: the insurance industry really wants to act for the benefit of its customers. However, we must make sure that we provide information at the level of the customer. It has become quite clear that the ‘small print’ period was a misguided effort – even though every item was fully explained in the insurance terms, and the customers signed the proposal in 10 places, they understood almost no legalities, and research shows that many do not even read it. No one is interested in keeping up this situation.

I consider the introduction of the KID the right direction – it is no coincidence that we have already acted on this matter, because I believe that when it comes to insurance contracts, less is more.

This has been recognised in the market, and in this context insurers now apply much more customer-focused approaches in the provision of information prior to contract conclusion, as well as in the handling of insurance policies and in the claim payment.

Luxembourg leads the way for the insurance industry

Posted on November 10, 2015 by Ashton Wenborn

Luxembourg is considered a world leader in terms of its delivery of insurance products and services. Part of the reason for this reputation comes down to the strict manner in which the insurance sector is regulated, with all insurers required to acquire the approval of a government minister before being allowed to open for business – the purpose of which is to ensure that each new entrant is financially sound and therefore unlikely to damage the stability of the market.

Once ministerial approval is obtained, companies within the industry are overseen by the Commissariat aux Assurances to ensure that their activities within the insurance sector are in line with national and EU laws. Due in part to its rigorous regulatory framework, Luxembourg’s insurance sector has developed into one of the best in the world. As a testimonial to this, nearly 90 percent of domestic insurers’ business is derived from outside the country. Another reason people choose to purchase an insurance in the grand dukedom is because of the high quality of service.

“Highly skilled people and a top class insurance brand have helped Swiss Life provide life insurance solutions to clients for more than 150 years”, Beat Reichen, CEO Swiss Life Luxembourg told World Finance. “It provides protection, stability and security to the insured individuals and their beneficiaries.

Due in part to its rigorous regulatory framework, Luxembourg’s insurance sector has developed into one of the best in the world

“By setting up a life insurance company in Luxembourg in 1985, Swiss Life managed to identify, long before the European single market has been created, a number of great opportunities outside Switzerland. With entrepreneurship and careful risk considerations, we have built up one of the leading insurers for the UHNWI/HNWI segment by combining wealth management and life insurance.”

Swiss Life and many of its contemporaries in Luxembourg have chosen to focus their attention and energy on supplying life insurance policies that are linked to financial instruments, such as investment funds. This allows them to develop specific products and services that not only offer life cover for their clients, but also provide the ability to make a return for clients. For example, many insurance contracts in the grand duchy are tied to dedicated funds, because of the favour the instrument has garnered within the wealth management sector.

According to Reichen, due to the company’s origins, he and his team are uniquely positioned to understand and cater to the needs of their clients. “Switzerland is the hometown of private banking”, he said. “Our people do understand the needs of the private banks and their clients. Creating a value proposition for the client, as well as for the partnering private bank, creates one for Swiss Life as well.”

For wealth planning providers such as private banks, family offices and tax advisors, Swiss Life Luxembourg offers onshore compliant life insurance products for most European countries. For distributing the products, it uses the European single market on a “freedom to provide services” base and all its products successfully manage to combine active asset management with the advantage of high-end life insurance to the full benefit of European residents.

Simple solutions
The specialised high-quality services that Luxembourg’s insurers provide have helped it to dominate the European insurance sector, and in particular the life insurance market – with non-life contracts accounting for less than 13 percent of the entire market, according to a recent report by BMI Research.

“Owing to a combination of factors, including declining vehicle fleets and a stagnant property market, we anticipate that the life segment will see continued growth in its market shares, reaching 88 percent by 2019”, reads BMI’s Luxembourg Insurance Report. “This leaves life insurers as the front runners, while non-life groups face escalating competition and dwindling revenues.

“Over the longer term, we expect to see significant consolidation in the Luxembourg insurance sector, with a number of smaller non-life groups losing out to international conglomerates that will benefit from economies of scale and can undercut their smaller contemporaries.”

The expertise on offer in Luxembourg is only part of the reason the country dominates the life insurance market. The other piece of the puzzle is the straightforward manner in which insurers serve their clients. “Our product, distribution and compliance framework, combined with tax and legal knowhow in each market, is the key to success”, said Reichen.

Insurance 2.0
High-calibre staff are at the heart of Swiss Life’s success, but something that is hindering the insurer is the low interest environment and the exaggerated European regulation that the region is enveloped by. According to Reichen, the low interest rate disables local insurers of offering guaranteed products, as the level of guarantee is not attractive once the given costs are factored in.

Another factor affecting annuity products is the simple fact that more and more people are living longer than many insurers originally assumed and calculated for. A longer life is great for the individual, but the additional reserving that is required in order to compensate for the longer duration of an annuity payment is in fact reducing the insurer’s margin and profit. So, as a consequence of improved health, these guaranteed and annuity products are slowly disappearing from the offering among many insurers.

To combat the decline of guaranteed and annuity products, there is a growing trend towards unit-linked products, where the investment risk is borne by the policyholder and pure risk products can be reinsured with the industry. This ability to quickly adapt to environmental changes has played a key role in Swiss Life’s success. For Reichen, the most important thing in any business is being able to identify opportunities – something that is made possible by having a very close contact with both partners and sales directors.

“Once identified, we have a structured approach to establish a business case, which will be submitted to the management for approval”, said Reichen. “A disciplined execution and constant monitoring ensures the success.”

Overcoming obstacles
The insurance market’s simultaneous strength and weakness has to be the EU regulation, which constantly requires increasing resources that merely erode the margins and, therefore, the profitability of insurers greatly.

Combine this with increasing capital requirements and the attractiveness for investors of the life insurance industry quickly begins to dwindle. In addition, the insurance industry is facing newly established national hurdles in terms of disqualifying tax conditions and consumer protection rules. This has impacted smaller companies (those below six to eight billion in revenue) intensely, and is likely to eliminate these players from the market, as there is not enough substance to counter increasing costs.

As a consequence of rising costs of doing business, many insurers are turning to technology to increase productivity and overall efficiency in an attempt to stem the tide of shrinking profit margins.

“Without clear IT supported processes you will not remain efficient and profitable”, said Reichen. “The entire industry is not there yet, as there are too many manual interventions and too many people engaged in the administration of life insurance contracts.

“At the same time, the fierce competition has led to a very low pricing. In other words, the clients are getting a tailor-made product at a mass market price. Prices will not follow the increased costs, so the production costs must be adjusted to the pricing achieved. Standardised processes, supported by high performing IT systems will be the next development and will be key to the future of the life insurance industry.”

But that is only the beginning, as there will be new service providers in Luxembourg to offer the outsourcing of the administration based on the created PSA status, with the life insurance industry following in the footsteps of the fund administration sector, which underwent similar changes just a few short years back.

But despite all the challenges ahead of it, Swiss Life is well positioned, as is the life insurance market in Luxembourg as a whole, because as ever, it is prepared to meet the obstacles in its way head on.

“We have invested into new administration processes, we do have excellent people and our brand is recognised worldwide”, concluded Reichen. “Every day, there is more wealth created and the UHNWI community is getting bigger.

“In a globalised world, the wealthy families are having global setups for their business and their family structure. Understanding their needs and meeting their expectation with our solutions, will ensure that Swiss Life remains a leading firm for the wealthy in the world.”

Jing-Jin-Ji: China’s new mega-region

Posted on November 10, 2015November 11, 2015 by Ashton Wenborn

The Chinese Government is in the midst of an ambitious project to integrate the Jing-Jin-Ji national capital region – composed of Beijing, Tianjin, and Hebei province – into one economic mega-region. Covering an area of land the size of Kansas, or six times the size of New York City, the region holds a population of roughly 150 million people – half that of the US.

The main focus of the integration will be infrastructure, with the creation of new bullet train services allowing for an easy commute between the regions – the basis of any attempt at economic integration. A new high speed train line between Beijing and Tianjin, for instance, has allowed passengers to travel the 90-mile distance between the cities in as little as 40 minutes; tracks are already being laid for a second line. Other smaller cities in the region are also being linked to the major urban zones by such trains.

150m

The estimated population of new mega-region Jing-Jin-Ji

Regional powerhouse
“Jing-Jin-Ji is not a city, but the structured integration of a regional powerhouse”, said Austin Williams, Director of the Future Cities Project and Associate Professor in Architecture at XJTLU University in China. It will see the major regions designated with a certain role, or, as The New York Times notes: “The new region will link the research facilities and creative culture of Beijing with the economic muscle of the port city of Tianjin and the hinterlands of Hebei Province, forcing areas that have never cooperated to work together.”

Factories and government buildings will be moved out of Beijing into hinterlands of the new region, easing up space in and reducing pollution in crowded urban areas. According to Williams, the plan will “remove many of the old industries from Beijing into more carefully considered industrial, commercial and manufacturing zones, and more importantly, build new ones”.

Local governments in China are often reluctant to allow manufacturing zones to leave areas of their jurisdiction, due to the revenue they provide from leases and tax, while at the same time pollution makes their presence undesirable. By integrating the region, relocating industry out of sight and smell becomes easier. The integration of the region will remove such particularistic interests, as wider regional considerations will take precedent.

Further, as Beijing’s population swells, the relocation of government bureaucracies to sparser populated regions will spur population growth in these less developed locations, easier urban crowding. It is hoped that central districts will see their population reduced by 15 percent. According to Wade Shepard, author of Ghost Cities of China, the Chinese government has often used locating government building to new areas as a vanguard of development and growth.

Years in the making
The plan itself has been in the works for many years; however it has recently come to a head. According Shepard, it is part of a wider push for integration between urban areas and cities across China. Integrating different urban zones is seen as a catalyst for economic growth. After years of break neck speeds of growth in urban areas, often sporadically and under autonomous initiative of local governments, large urban areas in close proximity are being integrated. Jing-Jin-Ji, however, will be China’s third mega-region, joining with the Shanghai Yangtze Delta and Guangzhou to Shenzhen Pearl River Delta – although this new project will see cities much further apart in distance integrated.

It can also be seen as part of Chinese President Xi Jingping’s anti-corruption campaign. For many years local government officials have operated autonomously from central government and often been able to engage in corruption with a certain level of impunity. By integrating regions such as Jing-Jin-Ji, lower level administrative units will have the rug pulled from beneath them, with greater authority given to higher levels of regional administration, which in turn are easier to control by the central authorities of the Communist Party.

KYC regulations challenge the banks

Posted on November 10, 2015 by Ashton Wenborn

The 2008 financial crisis left a legacy that caused a major shift in the financial world. Although for the best, a highly complex compliance framework now presents its own set of challenges to the industry, from rising costs to the difficulty of implementation. One such policy is ‘Know Your Customer’, commonly referred to as KYC. The logic behind the recent upgrade in KYC is reasonable; by demanding detailed information about counter parties, banks are less likely to engage in money laundering and terrorist financing unknowingly, while also being hampered from doing so knowingly.

That being said, compliance is no easy task – it requires a dedicated team of specialist data experts and a complete transformation of internal processes within institutions. So precarious has the situation become, that some banks are abandoning entire categories of customers so as not to face the looming risk. But ironically, doing so only increases the likelihood of fraudulent behaviour within the global financial network.

KYC is not optional. Unless complied with, it poses the risk of huge fines (see Fig. 1), as illustrated by the £7.6m fine issued to Standard Bank in 2014 for its failure to implement sufficient money laundering controls. As such, KYC is now an integral part of a bank’s risk based approach, which is vital for monitoring clients and counterparties. KYC enables institutions to understand risk more effectively, which is a crucial tool in a globalised network.

Through the correct implementation of KYC, financial parties are made aware of pertinent issues relating to a customer, such as their reputation, whether they have a fraudulent history or if they are currently facing money-laundering penalties. There is also the ever-important risk profile of the country in which the institution is seeking to do business, if sanctions come into play and whether there are any Politically Exposed Persons (PEP) involved.

KYC enables institutions to understand risk more effectively, which is a crucial tool in a
globalised network

Difficulties ahead
“Across the industry, banks are getting better at initial client on-boarding and data/documentation validation at the initial point of collection. However, with the introduction of many new regulations, such as Dodd-Frank and FATCA to name two, there is now an additional requirement to also categorise clients as part of the process”, said Patrick Hinchin, Director of Product Management at Accuity, a world leading provider of financial solutions.

Implementation is thus a costly enterprise, largely due to the complexity of decision trees and the necessary integration of technology platforms. Sourcing accurate and up to date data is a considerable challenge for institutions, which is made more difficult by the lack of standardisation across the industry. Furthermore, ongoing monitoring of counterparties and tracking any changes in relevant information requires integrated computer systems and a specialised team, not to mention the countless man-hours required for such an enterprise.

While keeping abreast of the latest details is necessary for each and every customer, the regularity in which it is necessary to do so depends on the risk profile of the client and the country. Those that are deemed as high risk will require re-evaluation more frequently and additional data points. Therefore, by understanding the level of risk to begin with, the system can be far more manageable than many presume. Of course, it is inevitable that in such shifts in working models, there are numerous teething problems during the transitional period, as evidenced in this case by the rising incidence of fines for poor risk management and data inefficiencies, which thereby indicate that there are still a number of inefficiencies in compliance procedures.

As a result of the increasing cost and difficulty of KYC compliance, a number of institutions are turning to de-risking, whereby they no longer offer services to entire groups of customers that score highly in terms of money laundering risks. De-risking impacts correspondent relationships considerably, while also preventing mutually beneficial financial dealings. In addition, there is a growing incidence of unbanked banks, in which larger institutions withdraw their support of smaller, local counterparts that rely on such partnerships significantly. Both outcomes could be particularly detrimental for countries seeking investment and project financing for much needed infrastructure development, which often happens to be those with higher risk profiles.

Moreover, de-risking is actually counter-intuitive as it can enable the very crimes it seeks to prevent. “Looking through a global lens, de-risking can actually lead to a higher potential for money laundering at some point in the payments chain. Entities that are being de-risked or unbanked will continue to operate and do business. However, there is more potential for money to be moved in illegal manner”, Hinchin told World Finance.

It is recommended that front house offices engage effectively with regulators so as to better understand how compliance can be carried out without the negative consequences described above. “Of course, to be able to do so, entities need easy access to a counter party’s data and documents, while also having exposures to their global transactions. This is where we see the industry using various vendor data to keep their systems up to date and to avoid mass de-risking. Especially as there are lucrative opportunities for banks in higher risk areas, having access to reliable information can encourage banks to maintain higher risk counter parties”, said Hinchin.

All-inclusive risk management
There may be situations in which a financial relationship must be terminated, as the risk cannot be managed successfully. Yet, this should not have to result in the cessation of entire categories of customers, as each individual must be assessed specifically. Doing so may require a new system in the bank’s internal operations, but it is not an impossible task. Traditionally, silo repositories have been used in financial institutions to store data regarding customers. New KYC requirements however necessitate a single customer view that is aggregated across the institution via a central repository.

A holistic approach facilitates regulatory compliance, while also assesses risks more efficiently through the in-depth identification of involved parties and a deep understanding of global exposures. This in turn improves customer service, which enables higher retention and conversion rates, as well as a superior level of internal communication within a bank.

“This is not an easy task and we see banks struggling with global and local regulations. An institution should primarily focus on its own jurisdiction and build relationships with all relevant regulators”, Hinchin explained. “To be able to achieve all-inclusive risk management across the board, risk, compliance and audit functions need to come together to form a combined view of risk management.” Given the importance of the task and the arduous process of continually fulfilling requirements, a number of banks have turned to outsourcing instead.

Third parties offer their own solutions, such as Accuity with its Bankers Almanac and Due Diligence Repository, which are managed by a team of data specialists that proactively engage with relevant individuals in order to maintain the latest documents and data. Thomson Reuters also provides KYC and client on-boarding solutions, as well as data management and due diligence for financial institutions using a standardised global policy for document collation.

There are still many challenges ahead, certainly in terms of compliance functions that continue to face difficulties due to limited resources and the volume of regulatory changes. The successful management of cross-border requirements will require significant investment into technology, data and the relevant expertise within compliance teams. To offset rising costs, it is crucial for banks to focus primarily on their own jurisdiction and build relationships with relevant regulators. This in turn will help institutions to manage compliance costs and stave off the temptation to de-risk.

Driving financial inclusion in Tanzania

Posted on November 10, 2015 by Ashton Wenborn

Tanzania’s has been one of Africa’s fastest growing economies in recent years, with annual GDP growth rates in excess of 6.5 percent (see Fig. 1). However, despite this growth, data still shows that strong economic growth has not translated into shared prosperity and better livelihoods for many Tanzanians. The country recognises that growth has to be inclusive to be socially and politically sustainable. One key component of inclusive development is financial inclusion, an area in which the country has been struggling. Currently, only about 15 percent of adults have access to an account at a formal financial institution. Broadening access to financial services will mobilise greater household savings, marshal capital for investment, expand the class of entrepreneurs, and enable more people to invest in themselves and their families.

World Finance spoke to NMB’s Managing Director, Ineke Bussemaker, about the role NMB is playing in boosting Tanzania’s banking sector and economic development.

How has the banking sector supported the country’s economic growth?
The Tanzanian banking sector is both a driver and beneficiary of the strong macro economic growth that has been realised over the years. Banks play a crucial intermediary role within the economy; gathering savings, then facilitating the transfer of financial capital towards alternative productive uses in the form of credit. For instance, at NMB, we hold over $1.5bn in customer deposits and provide net loans of over $1bn. The distribution of this credit to all the segments of the economy, by NMB and other banks, has fostered private sector consumption and investment that have been key drivers for the country’s economic growth.

What measures is the government taking to increase financial accessibility for Tanzanians?
The Government of Tanzania has been putting in place regulations, processes and initiatives that will make financial services more accessible to the majority of the population. For example, in 2012 the Bank of Tanzania, the primary regulator of banks, published guidelines for agency banking in the country. This now enables banks to utilise small businesses and entrepreneurs to become an ‘agent’ of a bank with the ability to collect deposits, allow withdrawals, facilitate transfers and open accounts. Agency banking has proven to be enormously successful at significantly increasing financial inclusion in Brazil and Kenya, we’re now looking to emulate that access in Tanzania. As the leading commercial bank in Tanzania, NMB continues to work closely with the government in helping devise and implement financial inclusion initiatives.

Tanzania GDP growth

How does NMB help to improve accessibility for Tanzanians?
NMB has always been committed to making financial services accessible to all Tanzanians. To this end we have sought to leverage our branch and ATM network to reach customers far and wide. Our bank has 173 branches across the country; we’re the only bank present in 98 percent of all government districts – in many places NMB is the only bank around. Our NMB banking agents are spread out across the country. As they grow in number, unbanked Tanzanians will find their nearest banking agent within walking distance. Tanzania is a very large country, larger than Kenya, Rwanda and Uganda combined, the distance to a bank branch has traditionally been one of the biggest impediments to financial inclusion. Our banking agent network greatly reduces this barrier.

Technology has become a critical determinant of banking success in Africa. How banking is conducted and how customers engage with their bank has changed dramatically. At NMB we recognise this shift. We were the first in Tanzania to launch an SMS-based mobile banking service, which we called NMB Mobile. NMB Mobile currently has over one million users.

How will NMB continue to promote Tanzania’s economic development in the coming years?
Our lending activities will continue to boost consumption and investment in the economy. For example, agriculture is a sector that has massive potential for Tanzania but has traditionally lacked such capital investment. At NMB, we’re already reaching over 600,000 small-holder farmers by financing their crop production. We’re also targeting larger commercial farmers and supporting their growth. Furthermore, we have tens of thousands of micro enterprises and SMEs that we provide credit to. In our corporate social responsibility activities we provide financial literacy and basic business training to many Tanzanians, empowering them with the knowledge and understanding they need to manage their finances.

What does the future hold for NMB?
We will soon be implementing our new five-year plan, under which we aim to align our product and service offering with the market environment Tanzania will find itself in by 2020. NMB will pursue a transformation in its scale and scope of operations by utilising its infrastructure and technology capabilities to drive efficiencies, growth and value. We believe that these initiatives will move us closer towards achieving our vision of transforming the lives of Tanzanians.

Chalhoub Group on the key to building a sustainable brand

Posted on November 10, 2015November 10, 2015 by Ashton Wenborn

Dubai is ranked second only to London in terms of international retailers’ percentage, making it one of the main global retail locations. This is only set to grow further, with new malls being constructed, companies increasing their investment in new technologies, and training more local talent in the kingdom. According to the Kearney Global Retail Development Index, retails sales in the UAE in 2013 grew by five percent, totalling $66bn.

The successful bid by Dubai for the Expo 2020 will further secure its dominant role. One such firm set to form a core of this boom is the Chalhoub Group. Founded in Damascus, Syria in 1955, it has today grown to distributing more than 280 fashion and cosmetics brands such as Christian Dior, Louis Vuitton and Christian Louboutin, across the Middle East. Now based in Dubai, the company prides itself on the personalised experience it gives to its customers, paying them attentive detail.

This personal and luxury experience, provided in person by their staff in-store is also now being replicated online, as they branch out into e-commerce. World Finance spoke to Co-CEO Patrick Chalhoub on how the firm is facing the challenges in the retail market today, along with how it combines an attentive service to customers while giving back to society.

Consumers and millennials in particular are starting to look at luxury brands beyond the logo, for the product itself

What have been the company’s biggest achievements over its 60-year history?
The journey started in 1955 when my parents established the first Christofle boutique in Damascus. The inspiration and essence is linked to the cultural and personal bond they shared with their circle of friends, which combined an appreciation for French beauty, elegance and savoir-faire, alongside a Middle East sensibility.

Since the beginning, our vision was to build successful luxury brands in the Middle East, giving them the tools and means to grow and develop. One of our biggest achievements has been to offer excellent service to all our partners and provide a unique experience to all our guests, making our group the leading partner of luxury in the Middle East.

We are extremely proud of what we have accomplished over the past 60 years. We have a dedicated team of 12,000, all of whom are engaged and working with passion, excellence, intimate knowledge of the region and its consumers, and consistently demonstrate our values of respect, excellence and entrepreneurship.

We are proud of being able to create our own concept stores which are a reflection of the group’s know-how, and this has already been successfully implemented and demonstrated by the leading perfumery network of Wojooh in the Middle East region which has flourished in Saudi Arabia, as well as the Level Shoe District which is the international leader for luxury shoe retail.

What is the thinking behind your new concept stores?
The Middle East customer is young and increasingly knowledgeable. A few years ago they needed reassurance and considerable advice, whereas today the customer is becoming more and more knowledgeable and assertive. They need not only access to brands, but also the choice among different brands, which they will find in department and specialty stores, such as the ones we are building.

Furthermore, the Abu Dhabi market has grown quite tremendously with the growth of franchise brands, but is lacking in specialty and department stores. The opening of Yas Mall, with its size and variety, needs to be anchored by a specialty store that offers luxury and aspirational products, which the group is introducing with Tryano. We expect Tryano to be an enchanting garden – alive, entertaining and very specialised in three categories: bags, kids and beauty.

What do they bring to the business?
The group creates unique multi-brand concept stores, with the aim to fill a gap in the market with choice and depth. We focus on creativity and innovation through the development of our own concepts, with the objective to bring something new to the market, through the offering, environment and services.

How are you working towards improved sustainability in the Gulf?
As the leading partner for luxury across the Middle East, we aim to be a role model for the region. We therefore encourage and motivate our team members to be engaged both on professional and personal levels in order to protect future generations. This is why we have created Chalhoub IMPACT, the sustainable engagement strategy for the Chalhoub Group, which aims to engage our teams and partners to improve social and environmental performance. The initiative is split into three pillars: empowering youth through education; environmental sustainability through behaviour change; and humanitarian assistance for social issues affecting local and global society through awareness and fundraising.

Chalhoub Group is a member of the UN Global Compact Community and we have launched our third white paper entitled Luxury in the Gulf: a sustainable future? Conscious about the challenges in the region, such as dependence on non-renewable resources and youth unemployment, the company work with the private and public sectors to find solutions.

What are some of the biggest challenges you have faced recently?
The customer is becoming increasingly knowledgeable, demanding and volatile. Thus, we have to offer a real experience, real knowledge and real storytelling. The customer is also less loyal due to an increased variety of choices in the market. To counter this, our stores are expected to become an extension of the home, with large spaces, including private areas, comfortable seating and legendary Arabic hospitality. It will be digitally enhanced with pre-booking, e-commerce and virtual trials simultaneously shared online.

Customers want to be recognised when stepping into the boutique; their tastes and needs anticipated. Products will have to be launched in the Gulf at the same time as in the West, as well as including special lines for Gulf customers in terms of sizes, cuts, shades and scents for the exclusive launch in the Gulf or ahead of the global market.

Other challenges include human resources and finding the right, talented people, and subsequently training them, particularly in our drive for the Gulfanisation of our resources where the group has taken a leading role to recruit and develop GCC nationals.

On the other hand, the market in the first six months of 2015 has been very challenging, and the group has had to adapt to the new ‘norm’ characterised by slower growth, due to overall macro-economic factors, affecting both local consumers and tourists, notably many from China and Russia. The weak euro has also created a pricing challenge (see Fig. 1).

How did you overcome these challenges?
We nurture our customer relationships, bonding and integrating with them through personal relationships with our staff and by building on the power of family and friends. We accompany luxury Gulf consumers and anticipate their aspirations. The other aspect is that we have to be extremely consistent in the way we present the overall story of the product, pricing, and service. We must maintain a coherent and consistent high-quality experience. We always have to remain innovative and creative, bringing new ideas, concepts, products and exclusive products to the consumer.

It is quite clear that the region has entered a new phase for luxury development. An increasingly maturing retail sector, global and regional macro-economic factors, as well as increasingly assertive consumers, are translating into much slower market growth. The personal goods luxury market has enjoyed eight to 10 percent annual growth over the last decade, but this will probably slow down to around four to five percent in the next few years. This obviously puts a lot of pressure on regional groups – though the market is still growing – but also presents opportunities for those brands that will be the most innovative and fully understand the needs and expectations of local consumers.

What are some of the biggest trends you’ve noticed within your industry?
Technological innovation is becoming critical in the luxury sectors. Consumers are connecting and advising each other, and engaging with the brands, wherever they are, whenever they want, thanks to the evolution of the digital drive. Beyond technological innovation, innovation in luxury products is also becoming fundamental in the region. Consumers and millennials in particular are starting to look at luxury brands beyond the logo, for the product itself.

How have you altered the company’s strategy to accommodate these changes?
We are driving the development of digital access in order to connect more closely with our customers. We plan to launch e-commerce sites for our own concepts – Level Shoe District and Wojooh – through which we will offer a seamless experience for our online guests, as we already do in store. We are establishing concept and specialty stores that will realise the evolution of our customers, while ensuring we offer an experience in our retail store that makes for memorable shopping experience.

What is next for the Chalhoub Group?
We would like to focus on guest experience and e-commerce. We also want to continue to innovate in the way we sell and engage with consumers, collaborating more with brands and address the specific needs of local consumers. Furthermore, we want to continue to develop and launch innovative retail concepts and continue investing in our people.

Goldman Sachs loses hope for BRICS

Posted on November 9, 2015November 18, 2015 by Ashton Wenborn

Goldman Sachs has dropped its BRICS investment fund in favour of a general emerging markets fund. The five countries that composed the BRICS label – Brazil, Russia, India, China and South Africa – were once coveted as the future of the global economy and set to shake up the world as rising geo-strategic powers. The past few years have seen mounting economic problems. In September, in a filing with the SEC, Goldman Sachs, reported the closure of the fund – only noticed by Bloomberg in early November.

The BRICS term became increasingly popular way to talk about the future of the global economy in the past decade

The term BRIC was first coined by Goldman Sachs economist Jim O’Neill in 2001 in a paper titled Building Better Global Economic BRICs, in which he pointed out that collectively the growth rate of the four countries put them on course for increasing importance in the 21^st century.

Five years later the investment bank set up an in-house investment fund in their name, dedicated to invest in these economies. South Africa was later added to the acronym. At its peak in 2010, the fund had a total of $800m worth of assets under management.

The BRICS term became increasingly popular way to talk about the future of the global economy in the past decade, with summits – hosted at the behest of BRICS economies – making use of the name. In 2014 the five BRICS economies joined together to form the New Development BRICS bank – a global development fund aimed at challenging the power of the World Bank and IMF.

However, the past few years have seen economic instability in most of the BRICS economies. Brazil faces a contraction of growth this year, along with inflation and a budget crisis, while Russia is mired in economic sanctions and the affect of the end of the commodity super cycle and South Africa has seen its GDP growth dip in 2015. China has seen a slowdown of its economic growth and unrelated turmoil in its stock markets – although its growth slowdown is an inevitable part of its transition to a medium income economy, it should be noted.

This change of fortunes in the BRICS has seen increased loses and poor performance for the fund leading to Goldman to disengage from these economies, with the fund dwindling to just $100m in 2015 before its eventual closure.

Coal’s appeal starts to burn out

Posted on November 9, 2015March 27, 2018 by Ashton Wenborn

An August-time snapshot of the FTSE 100 showed that the three worst performing stocks of the moment – at about 2pm – were Glencore (-8.55 percent), Anglo American (-7.81 percent) and BHP Billiton (-7.25 percent). The day was Black Monday, and the conclusion: coal’s status as a hot stock was no more. Faced with rising energy efficiency measures, spiralling construction costs and mounting hostility, has the reign of ‘king coal’ come to an end?

The most plentiful and readily available of the fossil fuel family, the first coming of coal laid the foundations for railways, shipping and much of that which characterised the Industrial Revolution and, later, globalisation. By most accounts, the lifeblood on which economic superpowers were built, and soon after on which emerging markets fuelled their expansion; the black stuff is suffering, and could soon face the prospect of a terminal decline.

“The coal industry is desperately looking for positives, but most appear to come from their own PR campaigns claiming that coal is the solution to energy poverty or that coal is amazing,” according to James Leaton, Head of Research at Carbon Tracker. “Coal has had over a century to solve energy access issues, but basic geography works against it now – rural off-grid areas in India and Africa are home to most of those without energy access. The cost of a new grid, coal transport infrastructure and new coal plants is not competitive with more appropriate renewable minigrid/off-grid solutions. US coal mining stocks have already lost the majority of their value and are filing for bankruptcy protection – so they have already taken a big hit.”

Dealt a killer blow in the form of government regulation, West Virginia’s barebones coal economy is barely drawing breath

Looking at the past five years, 26 coal companies have fallen prey to bankruptcy, and US coal equities for the period are down over 76 percent, according to Carbon Tracker. International Energy Agency (IEA) predictions show that demand for coal will grow at a 0.5 percent yearly average until 2040, considerably less than the 2.5 percent average for the past three decades, and buyers will shed their dependency on coal in favour of cheaper, cleaner alternatives.

America falling
Looking at the situation in America, West Virginia more than any other state paints a frightening picture of coal’s diminished place in modern industrialised society. The ‘Heart of the Billion Dollar Coal Field’ is but a shadow of its former self (see Fig 1 and 2). One recent report, authored by West Virginia University (WVU) and entitled Coal Production in West Virginia 2015-2035, reveals that coal mine output has fallen in each successive year since 2008. Once-thriving mining communities are awash with unemployment, and the facilities themselves are monuments to better days. Decimated by a lethal concoction of slumping exports, reduced domestic use, changed compliance standards and challenging geologic conditions, the frontier state turned industrial boomtown is teetering on a knife edge.

Going by the WVU report, statewide coal production is set to suffer a 39 percent decline in the period through 2015-35, driven by the aforementioned factors. Worse is that approximately 5,000 miners have lost their jobs in each of the last three years, and large subsections of the workforce are waking up to the realisation that experience in the pits pays for very little these days. Chopped down by market forces in the first instance and dealt a killer blow in the form of government regulation, West Virginia’s barebones coal economy is barely drawing breath.

By most accounts the worst hit of the 50 states, West Virginia is by no means the only one to suffer as a result of coal’s decline, and 2015 on the whole has been a deeply unsettling year for US coal. Plagued by a rash of bankruptcies and worsening fundamentals, Alpha Natural Resources was the latest coal company to file for bankruptcy this August, and an SNL Energy report published soon after found that 10.4 percent of all US coal produced in the second quarter stemmed from those that have filed for bankruptcy protection. Bloomberg Intelligence figures, meanwhile, show that coal production is at its lowest rate in 29 years, and the number of operational mines has fallen 39 percent in the last 10, down to a level unmatched since the late-19th century.

Going back to April, coal reached yet another milestone low when its share of US electricity generation slipped to 30 percent, down from 50 percent, and natural gas suddenly became the country’s go-to source of electricity. “The roof has fallen in on US coal, and alarm bells should be ringing for investors in related sectors around the world,” said Andrew Grant, Carbon Tracker’s Financial Analyst and co-author of The US Coal Crash. “These first tremors are among the clearest signs yet of a seismic shift in energy markets, as high-carbon fuels are set to be increasingly outperformed by lower-carbon alternatives.”

Where mining centres such as West Virginia were once rife with well-paid workers willing to do away with their cash in an instant, the opportunities for nearby businesses have dried up, and for Big Coal, the consequences are enough to unsettle investors. Stock in Peabody Energy, still the world’s largest private-sector coal company, was four years ago trading at around $70 apiece, yet its value in today’s market is barely above $2 on a good day, trounced by a shift to cheaper alternatives and new regulations both.

With the price of US shale gas down over 80 percent since 2008, renewables gaining in stature, and regulation eating into coal’s competitive advantage, the outlook is bleak for an American industry that has in years past launched an industrial revolution and lifted millions out of poverty. For the immediate term at least, the question of whether or not US coal is in terminal decline will rage on, yet the future of coal is by no means tied to that of America’s energy whims: there are factors at hand here that go far beyond US soil.

“It does appear that coal is undergoing a long-term structural decline, especially in the US, but also around the world,” said Dan Bakal, Director of Electric Power at Ceres. “The cost of extraction generally continues to increase at the same time that society is forcing coal’s emissions to be addressed and competition from renewable energy and natural gas increase. This combination of factors makes coal largely uncompetitive, which explains the drop in share value, bankruptcies and cancellations of new coal production plans.”

China rising
As the world’s largest producer and consumer of coal, China boasts an output almost the size of the rest of the world combined (see Fig 3), and any bad news for it is bad news for the industry overall. Looking at the first 10 years of the 21st century, China’s coal demand growth averaged at nine percent a year, more than twice that of the four percent global average and a great deal more than that of the US. This is the resource on which China’s economic engine was fuelled, although a reliance on the black stuff is not without consequence.

Of course, there were other contributing factors, but the simple truth is that China’s coal drive was at fault for the country’s declaration of a ‘war on pollution’. Fearful that it could cloud the skies further and contribute to millions more fatalities, the ruling administration has introduced countless measures to wean the country off of it. A rash of cutbacks and closures have even led some analysts to conclude that the country will reach ‘peak coal’ far sooner than originally forecast: whereas previous estimates ranged anywhere in the 2022 to 2027 bracket, the latest is that coal use will peak within five years.

“With data from China indicating a peak in Chinese coal use and improved efficiency of use, this could mean China disappears as a significant coal importer, and could even become a major exporter, weakening the market further,” according to Leaton.

Last year brought the curtains down on a long-running trend, when coal consumption suffered its first annual decline in 14 years. The alarm bells were triggered first when the China Coal Industry Association signalled that production was down 2.5 percent in 2014, and official data later showed that consumption had fallen eight percent in the first four months of the year, resulting in an emissions reduction equivalent to that of the UK’s total emissions over the same period. Positive for the country in that it marked the start of a clean up for China’s haze-ridden streets, the news was nothing short of a disaster for miners working under the assumption that demand had some way to go yet before reaching an inflection point.

The passage of the country’s new Energy Development Strategic Action Plan (2014-2020) late last year was key, in that policymakers in this instance imposed a cap on consumption (4.2 gigatons by 2020) and pledged to reduce coal’s share of the national energy mix to 62 percent. A national emissions trading scheme – due to start in 2017 – will likely inflict greater pressures on polluters to clamp down on ageing facilities. Intent on tackling smog and environmental pollution, coal has taken the brunt of the government offensive so far, and the spread of like-minded initiatives could prove the final nail in the coffin for coal.

“Renewables and unconventional fossil fuels will take a larger share, along with gas, which is set to be the fastest-growing fossil fuel, as well as the cleanest, meeting as much of the increase in demand as coal and oil combined,” wrote Bob Dudley, CEO of BP in a report entitled BP Energy Outlook 2035. “Meanwhile, coal is now expected to be the slowest-growing fuel, as industrialisation in emerging Asian economies slows and environmental policies around the globe tighten.”

No matter, China’s fallout with coal was always likely to come at a price, nowhere more so than in the US, where miners have ramped up production without a thought for how the market might play out once the boom times fade. What we’re seeing now is a response to China’s change of heart, manifested in the shape of a supply glut and a dearth of replacement buyers. Speaking on the transition to a low carbon economy, a recent Citi report entitled Energy Darwinism II stated that coal could suffer a steeper decline in the coming years, with “current market conditions likely to persist”.

Back to black
Make no mistake, the financial hurt for miners is real and the job losses are piling up fast. And yet, the risks as far as slumping demand is concerned are often inflated. While it’s true the industry is suffering its worst decline in living memory, demand for the resource is healthy and looks on course for good – if not extraordinary – things in the future. Many are united in the view that demand is not what it was, though the opinion – held mostly by environmental activists – that the industry is headed for an imminent collapse is overblown.

Going by the IEA’s annual Medium-Term Coal Market Report, global demand for coal is on course to break the nine billion ton mark by 2019, and demand in this period will grow at an average clip of 2.1 percent, down on the 3.3 percent rate for the period spanning 2010-13. “We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” said the IEA’s Executive Director Maria van der Hoeven at the report’s launch.

China, irrespective of its shrinking consumption habits, will account for some three fifths of the growth in the coming half-decade, with the rest stemming mostly from India and emerging ASEAN nations. Going by IEA figures, the use of coal in electricity generation will grow 33 percent, and demand for coal in South-East Asia is tipped to average 4.8 percent a year up until 2035.

For India, whose ambition to overtake China is within reach, coal has played a decisive part in meeting its rising electricity demands, and ambitious production targets mean that the country will be largely self-sufficient – at least as far as coal is concerned – before the decade is up. “The next big hope is India, but the fiscal situation means the government cannot afford to continue importing expensive coal and subsidise electricity prices,” said Leaton. The obstacles are proof enough that poorer nations are by no means free of the pressures dogging the US, China and others. And while the arguments in favour of coal have suffered on financial grounds, it’s really the environmental pressure that’s eating away at growth. “This still means coal consumption will continue in these major domestic markets – but we could see demand flattening off, rather than the continued growth the industry is banking on.”

Divestment power
Chief among the environmental pressures weighing on coal is the divestment campaign, which has seen numerous – and notable – investors withhold their capital in light of the resource’s impact on the planet. Similar to that which transpired in the case of tobacco, munitions and adult services in years passed, the divestment push has been gaining traction for little over three years, and its place in policy discussions is growing in stature. Beginning with a small band of socially minded individuals, the movement has spread to pension funds, asset managers and even fossil fuels companies.

Mindful of its impact on climate change, Total, the French oil giant and one of the world’s six ‘supermajor’ fossil fuel companies, recently confirmed its withdrawal from coal production and marketing. “We cannot claim to be providing solutions to climate change while continuing to produce or market coal, the fossil fuel that emits more greenhouse gas than any other,” said the company’s CEO Patrick Pouyanné of the decision. Likewise, German utility company E.ON has split in two, with one part focused on fossil fuels and the other renewables, to both appease the watching public and reduce its environmental footprint.

Other notable withdrawals include Norway’s $900bn pension fund, which confirmed its intentions mid-year, and the US pension funds CalPERS and CalSTRS, which were each left with no option but to divest upon the passage of SB 185 – otherwise known as the California divestment bill.

Fearful that ambitious international agreements on climate change will enter into force in the years and months ahead, those with an exposure to coal see the financial argument as reason enough to exit the coal industry. However, stubborn names will see that there are opportunities enough, namely in emerging Asia and Africa, to justify their involvement. What many may fail to justify is their contribution to climate change, and for as long as the pressure mounts on companies to accept some degree of responsibility for rising emissions, investment in coal – if only from a reputational standpoint – is unjustified.

“There are still some portions of the world, such as Indonesia, that appear to have strong demand in the near term, but it is hard to imagine a bullish long-term outlook given the likelihood for eventual public pressure to reduce air pollution, coupled with the continuing decline in cost of renewable energy,” said Bakal. “In areas of the world that are not yet served by an electrical grid, it is now cheaper to build distributed generation and microgrids than build large centralised coal plans and expansive grid infrastructure.”

Assertions that the industry is facing a terminal decline are perhaps a tad premature and, sparing a sudden and dramatic sea change, coal will find favour among emerging economies for which the resource represents a quick fix to the issue of electrification. What has changed is an unerring focus on, and increased awareness of its drawbacks. According to Leaton: “What is needed now is a responsible approach to managing the exit from coal, and ensuring that environmental and pension liabilities are covered.” Royal no more, king coal’s status has diminished to a cheap, polluting and non-renewable resource, fit only perhaps for the short-sighted and inexperienced players on the global energy stage.

Weyerhaeuser strikes deal with Plum Creek Timber

Posted on November 9, 2015November 16, 2015 by Ashton Wenborn

Washington-based Weyerhaeuser has agreed to a merger with its close rival Plum Creek Timber to create the largest private owner of timberland in all the US. The two entities, once combined, will amount to a $23bn timber company and manage in excess of 13 million acres of timberland, which will allow the two, under the single name of Weyerhaeuser, to realise greater economies of scale.

The deal is expected by both companies to close early next year

“These two companies are already best-in-class timberland managers with a relentless focus on sustainable resource management,” said Plum Creek’s CEO Rick Holley in a company statement. “The breadth and diversity of our combined land and timber assets uniquely position the new company to capitalise fully on the improving housing market, continue to capture Higher and Better Use land values across the combined portfolio, and create additional opportunities to build lasting value.”

The all-stock transaction is worth approximately $8.4bn in all, which represents a 21 percent premium on Plum Creek’s closing price as of November 6. Also contained in the deal is a $2.5bn post-closing share repurchase, which is slated for the first quarter of next year or early in the second.

The deal is expected by both companies to close early next year, and, once approved by shareholders, should save the two some $100m in cost synergies and deliver benefits to shareholders, customers and employees. “This new company will create tremendous benefit for shareholders as we drive value through shared best practices, economies of scale, cost synergies, operational excellence and disciplined capital allocation,” according to Weyerhaeuser’s CEO Doyle Simons.