Chinese oil companies have spread out across the globe looking for oil in remote locations to feed domestic demand. But like hunters from a previous age discovered, stepping away from your local watering hole can be dangerous. Sunni insurgents have captured huge swathes of northern Iraq in a relentless offensive over the past two weeks that has seen Iraqi troops disappear from their posts. Fighting is taking place for control of towns not 40 kilometers from the capital. Major western oil firms are pulling some staff from the country; PetroChina (PTR.NYSE, 0857.HKG, 601857.SHA) said it has withdrawn some of its workers too. The Chinese firm is the biggest foreigner investor in Iraq. China’s state oil firms control more than one-fifth of all Iraqi oil projects. But while global oil markets price up crude to factor in the conflict, the impact won’t drag Chinese oil firms down too much. “Baghdad is a buffer” between the insurgents in the north and Iraq’s giant oil fields in the far south that account for the bulk of production, Simon Powell, head of regional oil and gas research at brokerage CLSA, said on the phone from Hong Kong on Wednesday. Even if the conflict spreads to where PetroChina is working on the Halfaya oilfield, its earnings are not threatened, Powell said, as the contract for the site has very low margins and contributes just 1-2% of total net earnings in 2014. Oilfield services provider Anton Oil (3337.HKG) is more at risk. Some 20% or revenue and more than 20% of earnings come from Iraq, where most of the firm’s international work is done. “If conflict spreads to the far south and shuts the field then there could be some impact to 2014 earnings,” Powell noted. Anton Oil said in call with analysts on Wednesday that while it is still business as usual, it is monitoring the situation. Investors should be too.
Unexpected Chinese surprise sinks shipping alliance
Bobbing about in rough seas, last June three European container shippers decided to try and ride out the industry downturn together. They would pool 255 vessels on 29 trade loops via a joint center to ship goods from Asia to Europe, over the Atlantic and across the Pacific. AP Moeller-Maersk (MAERSK-B.CPH), Mediterranean Shipping Co. and CMA CGM SA were getting ready for a better journey. Regulators in the US and EU had given the all clear. But China’s Ministry of Commerce suddenly torpedoed the deal on Tuesday by voicing its opposition, leaving left Maersk and its fellow travellers swimming alone again. The P3 alliance is now dead in the water. “The decision does come as a surprise,” Maersk Chief Executive Officer Nils Smedegaard Andersen, told Bloomberg after the news broke. “I did not foresee problems in China. We only received what I would call positive feedback.” Investors were just as clueless. Shares in the firm fell 5.3% on Tuesday and weren’t staging much of recovery by lunch on Wednesday. No need to jump ship just yet, though. “Nothing … I don’t see the impact” on Maersk’s rating, Lars Heindorff, an analyst with ABG Sundal Collier in Copenhagen, said on the phone on Wednesday. “I think it’s a shame as it [the P3 alliance] could be a big game changer, for the industry to be more profitable.” Other partnerships including G6 and CKYH might step up in the meantime, Heindorff noted. Maersk could also join another alliance in the future. If they do, they’ll be hoping for no more surprise attacks to come out of Beijing.
Volvo, made in China, made unwanted?
Swedish automaker Volvo is planning to turn China into an export hub. The company has announced plans to ship Chinese-made sedans, a long-wheel-based version of the S60 called the S60L, to the US, while also exporting the XC90 utility crossover to Russia as early as the end of next year. The decision is likely to draw skeptism from foreign consumers, however. Volvo is owned by Chinese car builder Geely Holdings (0175.HKG). Volvo has a reputation for high safety standards and careful manufacturing; Chinese companies don’t. But those concerns are misplaced, Castor Pang, an auto analyst at Core Pacific-Yamaichi International, said by email on Friday. Massive auto recall rarely happen to mainland automakers, Pang noted, indicating production standards are not as poor as people would think. “Just as it didn’t shake its position as a luxury brand with high safety standards when Jaguar released its lower-class Tata, manufacturing Volvo cars in mainland China won’t change consumer confidence in their safety level as long as pre-delivery inspection is adequate,” said Pang. Tata Motors (TTM.NYSE, 500570.BOM), an Indian manufacturer of low-end cars, bought the luxury British marques Jaguar and Land Rover in 2008. Pang also pointed out that China’s position as an export hub and the technical exchange between Geely and Volvo presents opportunities for both parties. While Volvo continues to operate in the luxury car market and now enjoys lower production costs, Geely can utilize Volve technologies, which are often out of reach of domestic competitors, and gradually move upstream towards the luxury car market.” Reaching that segment would drive Geely’s earnings long-term.
IPO Watch
Next week is shaping up to be busy on the Hong Kong stock exchange. Chinese medicine supplier and retailer of imported ginseng Hang Fat Ginseng (0911.HKG), China New City Commercial Development (1321.HKG) and CC Securities (1375.HKG) are some of the biggest names with mainland exposure going public.