A turn in the commodities cycle has been long-expected. When prices were heading up, already forecasters speculated on when they would change direction. Yet the speed and the extent of the collapse of oil prices over the past six months caught nearly everyone by surprise.
The fall — not just in oil but in other commodities, too — heralds the start of a very different era for Latin America. Export earnings will be lower. Local currencies are weaker. And liquidity from the US will be less enthusiastic. For investors, bankers, borrowers and policymakers, the rout is a sharp reminder of the volatile nature of the commodities that much of Latin America still depends on.
The news is not all bad. Domestic demand, for example, should benefit. Low oil prices rarely generate a recession: they drum up consumer spending. Government price-setting will slow the pass-through in some parts of the region, particularly in Brazil, although already Colombia has cut gas prices.
Nonetheless, the slump in revenues is causing pain for energy companies and those that work with them. As that pressure builds, the mix of finance and investments taking place from Mexico to Brazil is changing, reshaping the profile of mergers, acquisitions, bonds and loans that are coming to market.
The fall in local currencies against the dollar is causing borrowers of all stripes to rethink the denomination of their debt. Some are already actively swapping their dollar bonds for locally-denominated paper. Others have found greater flexibility in discussions with bank lenders than in the bond market.
For the largest global players, smaller projects in Latin America may become increasingly difficult to justify. The region’s own big firms are cutting their spending and renegotiating deals with suppliers, making bond investors uneasy on the firms that rent out rigs, drillships and the like.
In Mexico for the most part, the opportunities from the historic energy reform are looking less enticing to the major global players who are themselves cutting capex. Investment in the industry there — taken as a given and described as being “priced in” just a few months ago — is likely to advance at a much slower pace.
Life will go on. But for the moment, a sense of dislocation is gripping the market. Production that is viable at $70 a barrel may not be economically sensible at $60. Companies needing cash are reluctant to part with assets based on an oil price of $48 a barrel. Those with money to invest are sniffing around for a great deal — something that is not based on an oil price of $90 a barrel.
But until the market value of oil steadies for at least a couple of months, that discrepancy between the right cost for many assets will roll on. LF