question archive Sharp Market Change in Commodity Prices Take Companies to the Edge: From the Oil Capital of Europe to a Small Mining Town in Australia A significant and sustained drop in commodity prices in 2015–16 (including a significant fall in the price of crude oil and metal commodities, such as iron ore and steel) had major implications for companies operating in this market (for example, oil and gas, mining and steel production)
Sharp Market Change in Commodity Prices Take Companies to the Edge: From the Oil Capital of Europe to a Small Mining Town in Australia
A significant and sustained drop in commodity prices in 2015–16 (including a significant fall in the price of crude oil and metal commodities, such as iron ore and steel) had major implications for companies operating in this market (for example, oil and gas, mining and steel production). The extent and prolonged nature of this decline were unexpected, and the consequences for companies has been felt worldwide including the wider commercial ramifications for supply chains, supporting services, towns, cities, regions and national economies. In this short case example, we briefly examine the outfall of this shift for the commercial viability of companies operating in the North Sea as part of the global upstream oil and gas industry, as well as the social and economic problems facing a small rural steel town in South Australia.
Aberdeen, a city, tagged as the oil capital of Europe, has been hit by company contractions, job losses and an overall decline in business activity, which has also had an adverse effect on the wider regional economy of Aberdeenshire and Scotland. The hospitality and service industries, real estate, retail and a wide range of small to medium-sized enterprises (SMEs) have experienced the wider business ramifications of this sharp downward shift in the price of oil. An article in The Guardian headlined ‘Aberdeen feels the sharp chill of tumbling oil prices’ (McKenna, 2015), recounts the massive 75 per cent fall in oil prices during the first quarter of 2015, noting that:
Tax receipts from oil accruing to Scotland between January and March (2015) were £168m, down from the £742m gathered in the final quarter of 2014. And nowhere is the economic wind-chill factor being more sharply felt than in Aberdeen. Amid tens of thousands of job layoffs … the previously unthinkable has happened. Once it was almost impossible to secure a room in a decent hotel for less than £100 a night and the airport, the business gateway to the city thrummed with commerce and workers. Now both these barometers of Aberdeen’s once bountiful economy have seen pronounced drop-offs. (Ibid.).
The importance of this decline in oil prices for Scotland and tax revenue has stimulated a broader debate among key stakeholders and politicians both within Scotland and the UK. Over 18 months the price of a barrel of oil has declined from US$115 to around US$25 in January 2016 (Bawden, 2016). New technologies and techniques have enabled an increase in US fracking which combined with a fall in demand from major economies, such as China and the rising supply of oil from countries like Russia, Venezuela, Qatar and Saudi Arabia had all contributed to this extraordinary decline. Although fluctuations in prices are to be expected and whilst there was a significant crisis in oil back in 1999, the extent of the fall and the potential long-term implications of this shift came as a shock to major operators in the North Sea and the regional economy of Aberdeenshire. But was there anything that could have been done to prevent the severity of this downturn and the wider implications for business within the region?
We now briefly turn our attention from the oil capital of Europe to a small town in Australia. Both have been badly hit by a sharp decline in commodity prices and whilst the comparison is something of a David (small town) and Goliath (oil capital) the issues and concerns are remarkably similar. Whyalla’s Arrium steelworks are facing difficult times in a declining market that is described as an ‘economy transitioning away from the resources boom’ (Griffiths, 2016: 25). Arrium has cut 300 jobs and cut operating expenses by AUS$100 million. It needs to reduce its operating costs by a further AUS$60 million in order to keep its OneSteel Whyalla operations going. The steelworks employs 1150 OneSteel workers, and 450 contractors and the State government has waived royalties on the iron-ore use at the steelworks and is looking at other support options including underwriting some company costs and investment in upgrades (Cook, 2016: 35). The decline in jobs and the contraction of Whyalla’s steelworks have impacted on local town business, such as the café, fashion store, real estate agents and butcher as well as local companies. Martelco Hire, who provided plant and equipment to the mining and construction industries, has as a result of this decline gone into liquidation (February 2016) with a debt exceeding AUS$1 million. As a journalist commented: ‘As Whyalla’s lifeblood, the Arrium steelworks faces a possible shutdown, the small-business owners of the shopping strip of Paterson St are confronted with a domino effect that could also close their doors’ (Cook, 2016: 34). In response, the South Australian government have mandated that Australian grade steel is procured for public projects, whilst other governments, such as those of Western Australia and Queensland, continue to use cheap Chinese imports. As Griffiths explains: ‘Whilst South Australia’s policy does not preclude overseas producers from tendering for projects, the Australian grade consideration will ultimately see demand for local steel increase’ (2016: 25). At the time of writing, the Advertiser reported that: ‘Arrium needs to find another $60 million in savings to ensure its Whyalla steel and mining operations continue and to save 3,000 jobs due to the downturn in iron ore and steel prices’ (Templeton, 2016: 9).
These two short examples illustrate not only the wider ripple effects of sudden shifts in the price commodities on local and regional economies but also the role of government and other stakeholders in seeking to prevent a major economic downturn. Although change is ongoing and unforeseen shifts and fluctuations in markets are not uncommon when major upheavals occur, such as the ones reported here or the more extensive Global Financial Crisis (GFC) of 2007–08, many people are taken unawares. It is often only in retrospect that these rapid, unexpected shifts are explained and made sense of. As we shall see, it is in the nature of change that the future is ultimately unknowable, even though we develop techniques and models to try to control for a future that is not yet known. In reflecting on these two short case vignettes and drawing on your own knowledge of what has occurred since the writing of this examples, consider the questions below not only with respect to these specific scenarios but in relation to your own experiences of how unexpected changes in the economy and society have impacted upon you.
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