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The Visit of Saudi Arabian King, Aramco IPO, Oil Prices, and.. Coal?

As we know, King Salman of Saudi Arabia is currently visiting Indonesia for nine days (March 1 – 9, 2017). And if we look at the fact that it was the first visit of Saudi Arabian King in Indonesia in the last 47 years, then it must be a special visit, and even the King will stay here for no less than nine days straight. The question, what’s so special about the visit?

If we look again at King Salman's destinations in his Asian Tour, we will find interesting facts: The four countries, namely Malaysia, Indonesia, Brunei Darussalam, and the Maldives, all of them are countries with predominantly Muslim populations (thus indirectly having a close relationship with the King, as fellow Muslim), and, economically, developing countries. While the other two countries, namely Japan and China, both are not Muslim countries, but are developed countries. From the King’s visit in Malaysia, the visit produced several economic deals, one of which is cooperation between Petronas and Aramco to build a US$ 7 billion oil refinery in Malaysia. While in Indonesia, King Salman will also put investment here, especially for infrastructure projects. How much? Well, up to US$ 25 billion.. including cooperation between Pertamina and Aramco to build a US$ 6 billion oil refinery in Cilacap, Central Java. A very big money, of course.

While for Brunei and Maldives, perhaps King Salman will also invest there, but there are no further details. As for China and Japan, the goal is the opposite: The King will invite the two countries to invest in Saudi Arabia. So a few months before King Salman began the tour, the news has surfaced that Saudi Aramco, the world’s largest oil company owned by the Saudi Arabian Government, will do an IPO in 2018, and the IPO will be the largest in the world, because Aramco will release its 5% stake to the public for US$ 100 billion (which means that Aramco is worth US$ 2 trillion). By the Saudi Arabian Government as Aramco's controlling shareholder, the proceeds will be reinvested into non-oil and gas sectors both at home and abroad, to reduce the country's dependence on oil. But of course, it is not easy to attract investors to put so much money on Aramco (US$ 100 billion is four times bigger than the current world’s largest IPO, Alibaba, worth US$ 25 billion). Maybe that's why King Salman himself comes to Japan and China, and possibly several other developed countries, to invite them to invest in Saudi Arabia, including buying Aramco shares.

So unlike other 'Petrodollar' countries like Qatar or United Arab Emirates, who only use their own money (the proceeds from oil and gas sales) to invest at home and abroad (Qatar Investment Authority is the owner of soccer club Paris Saint Germain, holders of 17% stake in Volkswagen, 8.2% stake in Glencore, etc. While Emirates Investment Authority is the owner of Manchester City, Etisalat, etc.), Saudi Arabia is more liberal that they also welcoming investments from abroad, including bringing Aramco to the trading floor. Indeed, some said that under the new Government (King Salman has just ascended the throne in January 2015, replacing King Abdullah), Saudi Arabia is now more ambitious to develop themselves to be a truly developed country. Because even though they have so much oil, and also the custodian of the Grand Mosque in Mecca that became the destination of Muslim pilgrims from all over the world, but they have no other economic resources. In terms of GDP, Saudi Arabia has GDP of only US$ 646 billion, or still behind Indonesia of US$ 862 billion (but the Arab population is only 29 million, or far below Indonesia’s which reaches 271 million, so their GDP per capita are much higher), so it can not be called a developed country.

And that ambition was revealed shortly after King Salman ascended the throne. Still in January 2015, the Arab Government launched the campaign of ‘Vision 2030’ which contains economic development targets in various fields for the Kingdom until 2030, including the launching of a US$ 2 trillion sovereign wealth fund, including proceeds from IPO Aramco. The Government of Saudi Arabia also established the Council for Economic and Development Affairs as the authority and executing body of the vision, and King Salman appointed his heir, Prince Mohammad, as chairman.

So what are the relations between the Vision of Saudi Arabia bla bla bla, with Indonesia?

There are several things. First, what Saudi Arabia does above in order to develop themselves to be a developed country, including by inviting other countries to invest there, it is similar to what Indonesia does today. In the past, foreign investment in Indonesia was only dominated by three countries, namely Japan, Singapore, and the United States, but Indonesia is now also a major investment destination for China, and now Saudi Arabia. With more sources of money, the nation will no longer be too dependent on one particular investor. Yup, currently Indonesia is just like Singapore who receives investment from all over the world. But fortunately, unlike Singapore, Indonesia has a vast territory and also many business sectors in natural resources etc, so we do not need to invest abroad because there are many areas and sectors in the country that can be developed. Especially from Saudi Arabia, if the Government succeeded in raising funds for their wealth fund, including succeeded in bringing Aramco to the stock market, then they will likely put tons of investments in Indonesia. Because if we look at King Salman’ tour of Asia,  it seems the Arab Government is only willing to invest in a country with the status as ‘our muslim brothers’.

Secondly, in order to successfully bring Aramco to the stock market, they have to make sure of one thing: A stable oil price. Because investors will not join the IPO if oil prices drop. So, back in January 2016 when oil prices fell below US$ 30 per barrel, I wrote that, considering the history of oil price since 1860, then buy counting the inflation, oil prices are more often at the level of US$ 15 – 30 per barrel, and will only rise above that range if there is a specific cause. In 2000s, oil prices soar to US$ 100 because of growing demand from China. But along with the economic slowdown in China, the demand for oil declined, and consequently the oil price returned to its normal level, which is US$ 15 – 30 per barrel (so it did not ‘falling’). You can read again the analysis here.

But today, after only a year later, the price of oil has risen to US$ 40 – 50 per barrel, whereas oil demand from China (or from any other countries) wan’t growing. But with the emergence of the story of Aramco IPO since a few months ago, then the rise in oil prices can be explained, is not it? If you look at oil prices in 2007, which once skyrocketed to as high as US$ 144 per barrel without any fundamental factors that could explain the rise, it might be easy for anyone with enough resources and accesses, to ‘set’ oil prices at certain levels. If the current price of oil still below US$ 30, the IPO for Aramco becomes impossible, especially with its gigantic target of proceeds.

Thirdly, as we know, the price of coal has also skyrocketed since mid-2016. I myself was surprised when the price of coal rose from US$ 54 to as high as US$ 100 per ton in just a matter of weeks, although later fall to US$ 80s. There is no fundamental factors that cause such rise, but later I remember a classic formula: If oil prices rise, the price of coal will usually rise as well. And indeed, the increase in coal prices from US$ 54 to US$ 80s, is approximately equal (in percentage) to the increase in oil prices from US$ 27 to US$ 53 per barrel.

And if oil prices could rise once again, or at least stable in its current position, then what do you think about the price of coal?

The combination of investment inflow from Saudi Arabia (and possibly other countries), stable oil prices, and rising coal prices, will eventually encourage the Indonesian economy to have a better growth in a few years, starting in 2017. Compared with 2011, when Indonesia experienced the peak of economic growth of almost 7% in the year, I can say that the condition is now much better. Because, look: In 2011, the prices of coal and CPO, which are the backbones of the national economy, were very high (coal price was at US$ 120 per ton, CPO was RM4,000 per ton). But in the same tima, the price of oil is also high at the level of US$ 100 per barrel, which forced the Government to allocate large budget for fuel subsidies (although Indonesia also have oil, but the level of oil consumption is far higher than production, so the country must import oil), so there is almost no more money left for development. On the other hand, the Government at the time had almost never received any new investments from abroad (except from existing international investors like from Japan, and the US). Before King Salman's visit, there was never a story that Saudi Arabia would invest here.

And if the price of coal is stable at least US$ 80 per ton, then although the price is not as high as in 2011, but on the other side the cash cost for coal production has also fallen by about US$ 10 – 20 for every ton of coal unearthed, mainly because of the fall in the price of diesel oil for heavy equipments. This means that even though the price of coal is now still below US$ 100 per ton, but coal companies can generate earnings that are almost as big as in 2011 ago! While for the Government, although now the price of oil is starting to rise again, but as long as the price does not reach US$ 100 per barrel, they do not need to subsidize the fuel like in the past, so the money can still be used for infrastructure development. And because there will be additional money from Arab, plus additional royalties and taxes from coal and other mining companies, it means the developments could be more intense. The combination between the rebound of commodity prices, the higher rate of development, will eventually encourage a better economic growth. In a few years from now, I believe that the economic growth of Indonesia will be as high as 7 – 8% per annum.

And of course, if all the above hypotheses become reality, the domestic capital market will be affected. In 2017, the Jakarta Composite Index (JCI) will likely to break a new high once again, after the last time it happened at the beginning of 2015. And if Aramco successfully go public in 2018 (Aramco will be listing on the Saudi Arabian Tadawul Stock Exchange, but because of its large size, it is very likely that it will also be listing (dual listing) in New York, Toronto, London, or even Singapore), the capital markets around the world will experience euphoria, especially in the petroleum sector, at least for a moment, especially if Aramco’s shares rise. And as global fund managers are eager to spend on oil companies around the world (not only Aramco), they will also come into Indonesia to buy stocks of oil and gas, coal, and other commodities. As a result the JCI, which may have risen quite high throughout 2017, in 2018 will rise even higher!

By the way, Teguh, are you really optimistic about the market? Yes, I am! After several years in the Indonesian stock market, only at this time I feel this enthusiastic. To be honest, we have been ‘fasting’ long enough for like four years, where the JCI had only been able to moving sideways since 2013 (when the JCI rose 15% in 2016, it only compensates the decline of 12% in 2015). And for the last four years, I myself had not seen any signs that the JCI will rise high like the 2000s.

But for today, well.. The signs are clear :) If all goes well, then in the next five years there will be a lot of new millionaires coming from the Indonesia capital market, and hopefully we are all included in it. Amen!

But also, experience has teached that as an investor, we should never in euphoria, but we have to be realistic and cautious. When I say that the JCI will break new high in this year, then it could happen, but it also could not, depending on what economic events that will happen in some future time. Thus, if there is fundamental changes related to the market, then the above analysis will be updated. Just stay tune!

Original article was written and published (In Indonesian language) in March 6, 2017. Any inquiries, contact the author (Teguh Hidayat) by email

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