The decline in oil price - Effect on the Stone Industry

 

 

The big economic news in recent months (and there are many) which has gripped the minds of economists, politicians and businessmen everywhere in the world, has been the sharp decline in the price of oil. This decline began in the last few months of 2014, and, as of end of February, 2015 the price was still approximately half of the peak price only a few months ago. How has the stone industry been affected, and, more important, how will be affected in the future, is a question that concerns a very large number of stone companies all over the world, not only those which are located, for example, in the energy producing Gulf Region.

 

 

First of all, before we analyze the different markets, let it be clear that no attempt is being made to predict the price of oil in the near, medium or long term future. Making predictions on the oil price is a risky exercise, only to be done by the real experts- and they too very often get it very wrong. So, for all we know, within a very short period of time, the price may well bounce back to previous levels- and the whole thing becomes a non-issue for everyone. For now, though, the rapid and sharp decline in oil price has knocked out the whole business strategy for hundreds of stone companies all over the world, especially those for whom the Gulf region became the main market during the last 5 years when the western world and much of the rest was bogged down in the deep economic crisis.

 

Thousands of containers of natural stone were shipped every month to the energy rich Gulf Region where the construction industry has been booming since the last 5 years, especially in Saudi Arabia, United Arab Emirates, Qatar and Kuwait. Frequently the buyers were Turkish companies who, because of the privileged location of their country, would re-sell (and install) the stone for projects in countries like Russia, Azerbaijan or other energy rich ex-Soviet Union countries, or re-sell to buyers in Libya and Iraq, apart from selling in the local market. Overall, for many granite and marble factories in Spain, Italy, Egypt, Turkey, Oman, Portugal, and also in China and India, the Gulf region was the most important market that saved many from bankruptcy after the financial shock of 2008. But what now?

 

The Russian market has clearly declined sharply in recent months, with the economy now expected to have negative growth of as much as -5%, according to some experts. Russia has always been a difficult market for any company, but the lucky few who persisted and finally succeeded, were actually supplying stone dozens of containers every month for the innumerable shopping malls and offices and other major projects that came up all over the country. But the economic sanctions on Russia by the West, and the sharp decline in the value of the ruble also played a major part in the decline in the Russian market. The ex Soviet Union countries rich in energy, like Kazakhstan etc. are all now facing economic stress.

 

Iraq and Libya had already collapsed as markets for stone earlier in the year 2014 before the oil price going down due to the appearance of Islamic State in Iraq, and civil strife within Libya.

 

In Saudi Arabia, the country whose policies can still actually make some difference to the price of oil, the authorities have actually increased public spending for 2015. But the problem is that by law the stone for government projects in the country must be supplied by local companies, so outsiders have little to do in this segment of the market. In private sector projects, one gets the impression that there is greater caution among investors, so unquestionably while there has been a modest decline in demand so far, there may well be a more serious decline over the coming months.

 

The same logic applies to Kuwait. In Abu Dhabi, a new caution among the authorities means that some big sized projects seem to be getting postponed, and may well be cancelled.

 

Dubai is an exception, it depends on oil for only 3% of its income. But its real estate market tends to be speculative in nature, and is strongly dependent on foreigners from elsewhere buying second homes there. If the oil price remains considerably low for a long period, then it is valid to ask the question- if the money circulating in the region is much less than before, say 30 to 60 % less, then surely, sooner or later, there will be less Saudis, Russians, Iranians and other foreigners to buy all those expensive homes that are being built in Dubai.

 

Qatar is another exception; the construction industry depends almost exclusively on government spending which has a huge surplus even now (and a tiny population). With the World Athletics in 2019 having been recently awarded to Doha, the construction activity planned for the World Football Cup of 2022 will only get accelerated.

 

Nigeria and Angola have seen a sharp decline in their income, and demand for stone has already declined sharply in these countries whose main source of revenue is oil. Ditto for Venezuela.

 

But unlike the financial crisis of 2008 which led to massive wealth destruction in the world, the oil price decline has actually meant a huge transfer of wealth - from the oil producing countries to the oil consuming countries. Some estimates place the transfer of wealth at 1.5 trillion dollars over a very short period of time - that explains the disruption in so many economic aspects everywhere. So, perhaps, demand for stone will shift fast from the oil producing countries to the oil consuming countries, and everyone can go home happy?

 

The story actually gets more complicated. The European Union, being a net energy importer, should be a winner. But this economic region has so many problems (Greece, Ukraine, high indebtedness, etc.) that the net effect is likely to be minimum. Only a few months ago there were fears of the European Union falling back in recession. Those fears have not entirely dissipated. Lower oil prices in Europe will do no harm, but the positive effect is likely to be insignificant. If not a drop in the ocean, it will still be, at best, a case of a few buckets in a modest swimming pool.

 

The US is now a major producer of oil, and, for sure, the balance sheets of the oil producing companies are being affected. The states which produce oil, for example, Texas and North Dakota, may see some overall negative economic effects. But the USA is a much more sophisticated economy, a huge consumer economy, and it was already doing well before the oil price decline. Some estimates place the reduced oil price as being a 2% tax cut to the average American consumer. Will the savings on gas bills lead to more countertops being installed, or bathrooms being remodeled? You decide if there is any connection between the two.

 

India is a big oil consumer, importing 70% of its oil needs. But the reduced oil price has been sensibly used by the Government to improve its balance sheet and to reduce oil subsidies. In due time, better government finances will definitely help the economy to grow faster, but in the short term the benefits for everyone are negligible and seen by no one.

 

China, too, is an energy importer, and a reduced import bill will be welcomed by the country. But the economy is now going through an economic transformation that will last several years, and one aspect of this transformation is to have a less speculative and more sustainable construction industry. With the construction industry currently undergoing a period of turmoil as a result of excesses, the demand for stone will depend on other, more important factors, not a reduced oil price.

 

In conclusion, the effects of a sudden and major reduction in price of oil has seen some decline in demand for natural stone in some concentrated markets. But the corresponding positive effects are much more diffused over many more countries, and will be seen only over the the longer period.