When we surveyed top executives from natural resources firms across the globe earlier this year on what they saw as the biggest challenges their firms faced, we learnt that many C-suiters rated currency and interest rate fluctuations high among their immediate concerns. The issue ranked second overall in our Willis Towers Watson Natural Resources Risk Index.
You might assume that executives would have different problems at the top of their minds than such everyday issues, but for me it makes sense that fundamental monetary and liquidity shifts continue to cause big natural resource firms so many problems.
The Risk Index was consistent with this: financial risks were seen as more important than the many other risks that executives identified during our research, from cutting costs while maintaining safe and high-quality operations to operating in hostile environments and financing new projects.
Firstly, that’s because it’s common for people to be worried about the things that have caused them significant problems recently. And we have been living in a volatile time in currency and credit markets, e.g., the U.S. dollar, the currency in which almost all major commodity trades are denominated, has undergone historically large shifts in its value relative to other currencies.
Looking forward, currency volatility will likely continue because ongoing money printing by major central banks is directly linked to exchange rate moves. Additionally, for those companies with high debt burdens, ongoing volatile funding costs will also be a further headwind to corporate actions.
Secondly, the U.S. economy is moving in to the late stage of its business cycle. We think the Fed will increase interest rates, albeit only slowly, as labor markets tighten and U.S. inflation gradually picks up.
The divergence between tightening monetary policy in America and accommodative policy in the rest of the developed world is also likely to push the dollar higher. A rise in the value of the greenback will push up operating costs for firms whose cost base is in the U.S. compared to foreign competition, and will also likely push down the value of commodities on global markets.
With finance likely to tighten in the face of higher interest rates in the U.S., and the dollar rising against other currencies, that means that many firms will come under further pressure to control costs, including staffing and new projects. And while firms in good financial shape won’t face too many problems, this will create difficulties for highly leveraged companies hoping to refinance their existing debt stock, especially in the U.S.
What all of this means is that all eyes are on the Fed, which is likely to start increasing interest rates before the end of the year, beginning a process that could see their policy rate slowly brought up to 2%.
Natural resource firms will need to be prepared.
This publication and all of the information material, data and contents contained herein are for general informational purposes only, are not presented for purposes of reliance, and do not constitute risk management advice, legal advice, tax advice, investment advice or any other form of professional advice. This document is for general discussion and/or guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
David Hoile is the Global Head of Asset Research for Willis Tower Watson.