Petroleum

The area of ethics in economics is a divisive one, over which there has been considerable debate. Ethics has many interpretations in the history of philosophy as well as in economic history. Very simply, ethics refers to an understanding of certain forms of behavior as either right or wrong. “The field of ethics, also called moral philosophy, involves systematizing, defending, and recommending concepts of right and wrong behavior.” (Ethics) However, there are many complex aspects to the understanding of ethics. An early idea of ethics was put forward by the philosophers Jeremy Bentham and John Stuart Mill in the 19th Century. They suggested that ethical action was concerned with providing “… the greatest balance of good over evil.” (Ethics)

On the one hand, economics is fundamentally driven in a systems and practical sense by the need to acquire profit and accumulate wealth. On the other hand there is a growing debate about ethical responsibility and integrity in the business and economic world, with respect to aspects and issues that strictly fall outsider the ambit of the pure science of economics per se. Recent controversies, such as the Enron scandal have also highlighted the issue of ethics in economics and business. This leads to a vast array of issues and questions; such as the protection of future resources and the growing debate about the reality of environmental ethics as it relates to purely economic concerns. Questions are asked such as; can there ethically be a case for unconstrained economic adventurism and profiteering without paying attention to the moral and ethical dimensions of these actions?

The debate and the dilemma that business faces in terms of ethical practices and views are concisely expressed in the following quotation. While “Businesses, in some parts of the world, have become integral participants in such causes as protecting the environment and alleviating poverty from economically depressed localities”, this concern with ethics is “… confronted with the problem that economists have no other way to approach reality without concentrating on questions of utility.” ( Zaratiegui J. 1999) It is this focus on utilitarianism and the profit margin central to the capitalistic mode of economic production, which brings it into conflict with other issues and views and often results in a negative ethical assessment of business and economics.

Therefore many critics are of the opinion that in an ethical sense the utilitarian focus of modern capitalism should be criticized. More importantly, theorists note that, “The nature of modern economics has been substantially impoverished by the distance that has grown between economics and ethics … [economics] can be more productive by paying greater and more explicit attention to the ethical considerations that shape human behaviour and judgement.” (Sen, A. 1987, p 7.)

It should also be noted that this debate and the alleged dissociation between economic thought and praxis and various ethical and critical stances, is a fairly recent phenomenon. In its origins modern economics was intimately connected to ethics and ethical motivations.

Sen reminds us of the contrast between the “non-ethical” feature of modern economics and its genesis as an offshoot of ethics. At the time of its inception, then, the language of economics was comprised of normative elements. Nevertheless, over time, economics came to be considered an autonomous science, and its language and value judgments become increasingly more “positive.”

It is this change in economic thought and praxis and the move towards a neutral or ” value free” attitude towards ethical issues, with science as the motivating example, that has essentially created the present debate.

However the debate about ethical involvement and responsibilities in economics continues to vacillate from one point of view to the other. On the one hand, economists argue that economic praxis and associated analytic techniques are ethically positive in that they help to predict human social and economic growth and development in a consistent way. Economists are also quick to argue and provide examples of the way that economic strategies uplift, develop and form a common basis for world interaction and harmony. “.. it is regarded by some as beneficial, enabling economists to develop analytic techniques and make rational predictions of future human behavior. “(Zaratiegui J. 1999)

On the other side of the argument there are many who interpret the alleged benefits of economics rather as the promotion of profit over ethical norms and principles. However in recent years there has at least ostensibly a reassessment of the ethical parameters of economics from within the economic community.

As recently as a decade ago, many companies viewed business ethics only in terms of administrative compliance with legal standards and adherence to internal rules and regulations. Today the situation is different. Attention to business ethics is on the rise across the world and many companies realize that in order to succeed, they must earn the respect and confidence of their customers.

This change is still based in the praxis of customer behavior and reaction but nevertheless it does show a change towards a greater awareness of ethical responsibly ion the world.

Many of the ethical debates surrounding economics revolve around the complex issue of the interactions of business and commercial concerns and bio-ethics. Bio-ethics refers to the ethical demands and requisites in the interaction between the human and the non-human environment. As such, bio-ethics is difficult to relate to or argue in purely subjective or human terms; which make it all the more difficult to understand and react to from an economic perspective.

A case in point which is still under discussion is the intended use of the oil reserves in the Arctic Wildlife Refuge. At present the debate about the exploitation of the Arctic National or ANWR has been in process for 20 years. (Endless debate drains political energy) The debate has tended to centre mainly on the exploitation of a sensitive ecological area as opposed to the economic and political value for the country from a potentially rich oil supply. The divergent viewpoints are expressed in the following assessment of the situation.

To generalize, people who care most about the wildlife and wilderness don’t give a hoot about the oil; folks fixated on the oil think its value outweighs the wildlife and wildland concerns. The two sides are every bit as polarized and only a little less passionate than those battling over abortion rights”

The National Petroleum Reserve of Alaska (NPR-A), is situated between the foothills of the Brooks Range and the Arctic coastline, and is about 120 miles from the Arctic National Wildlife Refuge (ANWR). (Rosen, Y. 2003. ) The Bureau of Land Management ( BLM) estimates the area will”… supplement production from the Alpine fields, which hold 429 million barrels and have a daily oil output of about 100,000 barrels.” (US OKs Commercial Drilling in Alaska Oil Reserve)

From an economic point of view, the use of this oil reserve will have many positive aspects. Besides the money that would be brought into the economy instead of flowing out in oil purchases, it would have positive internal and political implication as it would obviously mean less reliance on outside oil sources.

The Energy Information Agency of the Department of Energy estimates that Alaska oil production averaged 902,000 barrels of oil per day from January through August 2004, about 16 percent of total U.S. oil production during that period, most of which comes from Prudhoe Bay. Opening up even a limited area of ANWR for drilling would offer the prospect of producing from Alaska possibly 40 percent or more of the oil consumed in America.

This view can be seen as supporting the idea of an ethical position in the economic exploitation of the region in that it will be for the “greater good” of the international community to reduce America’s oil dependencies. The other side of the argument is that the exploitation of this region for profit will upset the delicate ecological balance and will further have a larger ecological impact. From this point of view the proposed economic actions are unethical. In essence the debate is centered on two very different world views which need an understanding of their underlying biases to be fully comprehended.

Many similar points of dissention and lines of argument are formed in the ethical debate that has raged for years about animal experimentation for research. One has the argument for experimentation on the basis of ensuring human safety; while those opposed point out that this view still contravenes basic bio-ethics and the respect for life on this planet. On the one hand business and commerce stress the need to test products before public consumption and on the other hand activists state that many of these tests are simply attempts to placate the public and have no intrinsic scientific worth.

Animal rights groups point out that animal experimentation is an extremely cruel endeavor. Among the many different types of animal extermination are the”… the toxicity and irritation testing of various consumer products, such as foodstuffs and cosmetics…extraction of products, and the development of drugs.” (Rollin, 1992, p. 136) One of the most criticized tests in this regard is the Draize eye irritant test. This test involves “… placing a substance in the eyes of four to six rabbits and evaluating the effect.” (Thompson 1988, p15.) The results for these extremely cruel experiments are used for cautionary labels on various products such as soaps and cosmetics.

One of the main arguments against commercial vivisection is that many scientists claim that there is no real scientific purpose to animal experimentation. This is a particularly the case with regard to animals which are used by pharmaceutical and chemical companies to test the toxicity of drugs and other substances, including cosmetics and household cleaners. This practice has been regularly criticized by doctors and scientists who are of the opinion that these experiments are not only unscientific but also flawed in many respects and even dangerous to human health. Countering these assertions the economists point to the many successful trials that have resulted in positive results and benefits for human beings and human health.

The economic world is, as has been stated, becoming more aware of its ethical responsibilities. Some critics still see this new found ethical responsiveness in the scientific and economic communities as a reaction only to pubic opinion and customer perception. However there are also those who are more positive and who think that the economic community is becoming more aware and reacting more positively to the important ethical dimensions of their activities.

Shell Company Analysis Dr. Scruton Methodist University Management and Organization Abstract Shell Oil is a global company in the oil industry. This long established company has withstood the test of time in this competitive market. Management practices have established the resources necessary to overcome the obstacles of a global company. This detailed analysis of Shell Oil focuses on management in order to provide an understanding of how the company is able to succeed. The organizational analysis provides insight into Shell’s goals, culture, and resources.

An example of a specific roblem that Shell faced, oil spills in Nigeria, continues off of the company analysis. Nigeria is a major extraction location for shell, but sabotage and oil leaks grew to be a major concern. Shell faced court cases in search of relief in Nigeria, but the majority of the oil leaks were a result of sabotage; therefore, shell was not responsible. However, people believed that it was shell’s responsibility to safeguard the oil lines and prevent sabotage in the first place.

Shell funded the cleanup of previous oil spill sites along with a major advertising campaign to avoid a negative impact on its usiness. Some people still believe that Shell should be taking more responsibility for the oil spill crisis in Nigeria. Oil is a resource that has been in great demand since the production of combustion engines, as well as other industrial machines. Royal Dutch Shell, commonly referred to as Shell, has been a dominant force in the oil industry for over 100 years. Shell management has enabled success and allowed the company to overcome any obstacles.

An in-depth analysis of Royal Dutch Shell’s management techniques provides information on how it can conquer the challenges of change. A ecent challenge that Shell faced in Nigeria indicates that Shell has the necessary resources to prevail. Shell continues to be a driving force in the oil industry from the business aspect, but Just now prosperous is this global company. A man named Marcus Samuel founded an antique business in London. Seashells were among the products that he sold, which is how Shell acquired its name. Marcus grew fond of the oil exportation business during a trip to Japan.

Before the invention of the combustion engine, oil was merely used for lighting and lubricating small components. Marcus and his brother Sam transformed the oil transportation ndustry with their company, Shell Transport. Expanding the business lead to a merger with Royal Dutch Petroleum in 1907. Royal Dutch Shell rapidly expanded production throughout the world, included places like Russia, Romania, Venezuela, Mexico and the United States. Today, Royal Dutch Shell operates in more than 70 countries. Shell is able to produce 3. 3 million barrels of oil in a single day generating $467. billion dollars revenue annually. Organizational Overview: Shell Corporation has a website that addresses all the publicly known information about the organizational operations in the United States and throughout the global conomy. The Shell website does not specify a specific mission statement. According to Mission Statement (2013), “The mission statement should be a clear and succinct representation of the enterprise’s purpose for existence. ” While Shell. com does not specifically list anything labeled as a mission statement, it does identify a purpose to the organization.

The corporate website under Our Purpose (n. d. ) states: The objectives of the Shell group are to engage efficiently, responsibly and profitably in oil, oil products, gas, chemicals and other selected businesses and to participate in he search for and development of other sources of energy to meet evolving customer needs and the world’s growing demand for energy. The planning methodologies utilized by Royal Dutch Shell include: a vision, the mission, the strategy, the goals/tactics, and metrics (“Strategic Planning,” 2009). The vision leads to the mission.

The mission in turn enables the creation of the strategy. Strategy gives a guideline for the goals/tactics and metrics. The vision is to provide for the future energy needs of the people while preserving the environmental health of the planet (Shell. com). The mission, or purpose, is identified and explained in the above paragraph. Shell states that their strategy is innovative and competitive. As recently as 13 January 2013, Shell released its strategy as innovative and competitive to the news and media. Shell CEO directly states, “Shell is competitive and innovative.

We are delivering a strategy that others can’t easily repeat, with unique skills in technology and integration and a worldwide set of opportunities for new investment” (“Shell Delivering,” 2013). Robbins and Couter (2012) define competitive strategy as, “an organizational strategy for how an organization will compete in its usiness (es)” (p. 231) and innovative strategy, “aren’t necessarily focused on Just radical, breakthrough products. They can include applying existing technology to new uses” (p. 238). Shell is not new to using both these strategies to survive the challenges with the very competitive oil market.

Arie de Geus (1988) was head of planning for the Royal Dutch/Shell Group companies and employed with corporation for 30 plus years; identifies that out of survival for the Shell Transport and Trading Company in 1907 to compete with the Rockefeller’s Standard Oil it had to Join with Royal Dutch Petroleum. This innovative idea of Joining the two companies allowed the company the ability to continue to compete competitively and still going strong more than 1 00 years later. The customers ot Snell are those people that purchase or use the products produced or shop the store locations around the world.

Shareholders are those that have investments or hold shares in the corporation and either profit or lose from the businesses operations. The competitors to Shell are other major oil companies; this includes companies such as BP, ExxonMobil, Chevron, and many more throughout the globe competing for the oil market. Stakeholders are a much broader range of people or groups. All activities of the corporation that influence or affect those in or around it can be considered a stakeholder. The employees, shareholders, and competitors are all affected by the happenings and success of the company.

As oil prices keep increasing, many are looking to a future without oil. It is hoped that if oil prices keep rising, alternatives will be developed and this will enable a smooth transition. Already, car manufacturers have cars which run on hydrogen, natural gas, even solar panel. The longer oil prices rises, the more attractive these options will be. It is not unfeasible that in a decade, we will simply not need or want to consume oil any more. However, this transition to a world without oil may not be as smooth as many hope.

The transition to a post-oil world could be a lot more painful that we would like to admit. How would an oil free world impact on the world economy?

The Doomsday Scenario

The impact of declining oil availability depends on whether the alternatives to oil materialize. For example, it was hoped nuclear fusion would provide low-cost energy, but, technological developments have been disappointing. If we don’t find realistic alternatives to oil, the consequences for the global economy could be serious.

Rising prices and costs, declining growth and living standards as people struggle to meet their energy needs. The world has become so dependent on oil, the question is could we survive without? Wealth of Oil exporters would be reduced. At the moment, oil exporting countries are earning billions of dollars in oil revenues; this gives them economic power and to a large extent political power. If oil is no longer in demand, these countries would face a rapid period of readjustment; they are likely to face a fall in wealth, unless they could create growth in other sectors.

The problem is that it is currently so easy for them to make money from oil other sectors of the economy are fundamentally underdeveloped, therefore they would struggle in an economy no longer reliant on oil. Oil Importers Could be Relatively Better off. The change in the use of oil could lead to a readjustment of global finance and power. Currently OPEC countries have disproportionate amount of wealth. Oil importers are struggling with rising oil prices. This would all change if oil was no longer the key world commodity. But, this relies on good alternatives being found

Cost of Transport

The new technologies are unlikely to be as cheap as petrol-powered cars were in the past. If this is the case, it means transport will be permanently more expensive. This could help to reduce our reliance on the motor car; it could encourage other forms of transport such as buses, trains and bikes. However, this is very much an unknown. It is difficult to predict the future price and availability of alternatives. At the moment they are more expensive than petrol; but, maybe cheap alternatives could be found in the future.

Environment

Consumption of oil has contributed significantly to global warming and pollution. One side benefit of the rising oil prices is the improvement in pollution emissions in the US and Europe as higher oil prices discourage consumption. It is hoped that the alternatives to oil will be more environmentally friendly and help to reduce carbon emissions. However, will it be too late to stop global warming by the time the world makes the transition to a non-oil based energy?

Oil Companies

The most profitable companies are often oil companies. like Shell and BP. They may struggle to move into a post oil world. BP has given itself the slogan Beyond Petroleum; but, whether they will be able to be as profitable from other energy sources is doubtful.

Marketing

Marketing has been one of the main targets for the company. ExxonMobil Gas & Power Marketing is one the company’s affiliated sectors that is non-government controlled with its offices in Leatherhead for the European region and aggressively markets natural gas. The company’s effort to divide its business functions into semi-independent sections and companies is in the effort to ensure specialized, custom, efficient and effective operations management. The United Kingdom is one of the highest consumers of natural gas and the ExxonMobil supply gives about 21% of the consumers needs.

Not only does the company sell the gas directly to the consumers but it also sells to other companies that resell the product to the consumers. Through joint ventures the company is able to supply its products to consumers in areas where it may not be possible to locally get the products through local production. The ExxonMobil refining stations facilitate the company’s ability to have supply and logistics efficiencies way past those produce by the physical combination of services and facilities.

This strategy enables the company to enhance decision making processes on its crude procurements, inventory management and overall company operations. For the fuels and marketing sections, the company employs various strategies that are aligned with the line of business; Esso, Mobil and Exxon. ExxonMobil is also one of the leading producers of petroleum specialty products such as waxes for coatings and candles, process oils essential for production of such products as synthetic rubber, as well as asphalt for road paving and roofing worldwide.

ExxonMobil’s strategic marketing process is seen in the way it aligns its brands with the flexible needs of customer segments. Mobil is one brand that is focused towards the consumers in need of high performance while Exxon/Esso are brands aimed as satisfying the consumer demand for reliability and efficiency. To a worldwide customer base of over 1 million, ExxonMobil’s markets, supplies and sells its fuel products and services through three business-to-business segments namely; the Aviation, Marine as well as Industrial and Wholesale sectors.

ExxonMobil Chemicals ExxonMobil is one of the leading producers of petrochemicals. Being one of the leading producers of olefins, the basic petrochemical building blocks worldwide, ExxonMobil is also the leading supplier of polyolefins that include; polyethylene and polypropylene. In addition, the company is one of the major producers of paraxylene, one of the fastest-growing petrochemicals, and benzene which is a primary building block for various products.

The company also holds leading positions in varied portfolios of a range of specialty business lines that include, but are not limited to, petroleum additives, butyl polymers, ethylene elastomers, oriented polypropylene film as well as adhesive polymers. The main source of the company’s success can be commonly attributed to its strategy resulting from its ancient practice of situating its key chemical plants right adjacent to world-class refineries that in turn provide economical feedstocks and paves way for products that are not only extensive economically attractive but also meet the customers’ needs.

Being one of the world’s leading supplier of lube basestocks as well as the largest worldwide marketer of lubricants, ExxonMobil’s attributes its success to the unwavering supported it gets from its highly trained and skilled field workforce, well developed distribution system/network as well as the great supply chain. The company’s supply chain is broad so as to include a group of 13 lube basestock refineries and 48 blend sites which in turn enable ExxonMobil to deliver delivers high-quality end products and application proficiency to its valuable customers worldwide.

Having regional complexes, the company’s world scale manufacturing sites, is one other competitive advantage that ExxonMobil has implemented to serve customers in rapidly growing regions such as Canada, United States, Netherlands, UK, and Belgium Saudi Arabia and Singapore in the Asia Pacific. This is a strategy that is mainly targeted at offering capacity to satisfy every regions customer preferences while affirming the company’s commitment to offering high quality products development expertise as well as competitive proprietary processes.

Shale gas is natural gas formed from being trapped within shale formations. Shale gas has become an increasingly important source of natural gas in the United States over the past decade, and interest has spread to potential gas shale’s in the rest of the world. In 2000 shale gas provided only 1% of U. S. natural gas production; due to rising oil prices gas prices have also been affected by the rise therefore there was big demand for gas in the US which in 2010 it was over 20% and the U.

S. government’s Energy Information Administration predicts that by 2035 46% of the United States’ natural gas supply will come from shale gas. I would like to mention that Chesapeake energy is the leading US company in producing Shale gas with a market cap of 13. 6 Billion US $ (which I think it’s a good choice of adding it to your investment portfolio). Starting as early as 2017 the USA will start to export LNG to other world markets.

Recently a company called Freeport LNG Development LP, which opened a facility on the Gulf Coast to import liquefied natural gas four years ago, signed a 20-year contract with two large Japanese power companies (Osaka Gas Co. ; Chubu Electric Power) to export natural gas from it instead. Freeport LNG is in advanced talks with Royal Dutch Shell PLC for a similar export deal that would allow the energy giant to ship out natural gas to foreign end customers. The emergence of vast new supplies of natural gas from dense shale rocks has upended expectations that the U.

S. would become a major importer of liquefied natural gas, or LNG, from overseas. Now, many industry officials believe the U. S. could emerge as a major exporter, a development that could have a significant impact on the U. S. trade deficit. Drilling Shale Gas wells is not an easy task thanks to introducing new technologies like the Horizontal drilling technology which is used to drill the shale gas wells, with lateral lengths up to (5,000 m) within the shale, to create maximum borehole surface area in contact with the shale.

ECONOMICS ASSIGNMENT For a market of your choice, keep track of the spot or share price fluctuations during a period of at least two years. Prepare a report of approximately 3000 words, for each market, discussing in detail the multiple forces (interesting developments) responsible for the trends. Tuesday 24 May 2011 Table of Contents Executive Summary Executive Summary In analysing the consumer market, we have chosen the share prices of two JSE listed companies, namely SABMiller and Rainbow Chicken which belong to the beverages and food producer’s sub-sectors respectively. Our two-year analysis is for the period March 2009 to May 2011. We will explore how Rainbow Chicken fared relative to its nearest competitor – Astral Foods.

SABMiller allowed us to expand our thinking and methodology as the company also has a dual-listing on the London Stock Exchange. Its three closest competitors Heineken, Anheuser-Busch InBev and Carlsberg Breweries have foreign listings. It stands to reason, therefore, that we begin our assignment with an overview of the global context in which both companies operated in the period under review. The aftermath of the recession and changes in global economic indicators like the ZAR:USD exchange rate and the price of Brent crude oil will be examined.

What we found particularly interesting was the resilience of both company’s share prices in the challenging global economic climate. We mention the factors that insulated each share from the global downturn. We then turn our attention to South Africa’s economic environment and examine the extent to which the foregoing global factors impacted on South Africa’s macroeconomic policy landscape. The two variables that we pay particular attention to are the local repo and CPI rates.

We address the extent to which changes to these local variables impacted on the share prices of SABMiller and Rainbow Chicken. As mentioned in the first paragraph, our analyses consider the industries in which both companies operate by comparing their share prices with those of their nearest competitors. Our company analyses focus on internal considerations and the strategic objectives detailed in SABMiller’s and Rainbow’s annual reports for the 2009 and 2010 financial year ends.

In our analyses of each company’s share price, we remain mindful of the fact that, although not directly responsible for the share’s daily performance, the objectives and calibre of management nevertheless impact on the share price. We conclude each analysis with a justifiable prediction of the expected trajectory of each company’s share price. The concentric eclipses in the diagram below depict the logical progression of our assignment’s structure, beginning with the outer-most eclipse.

The diagram also shows the inter-relatedness of each eclipse relative to the other and how it is impossible to isolate the effects of one from the other. This reinforces the aphorism that: “in Economics everything is related to everything else; and usually in more ways than one. ” The Global Environment [pic] Source: www. eia. doe. gov The price of Brent crude oil has been steady at an average level of $70 to $80 a barrel until November 2010. Since December 2010, the oil price has been rising, reaching a peak of $120 / barrel in April 2011.

This has been partly due to uprisings in the Arab world, which holds the majority of global oil reserves. The oil price affects domestic inflation as fuel and energy are a major component of South Africa’s CPI basket. The price of petrol, which is based on oil prices, also raises logistical costs. SABMiller and Rainbow paid more to transport their products in the December 2010 to May 2011 period as a result of the spike in oil prices. It stands to reason that these higher transportation costs would be passed on to consumers as higher product prices by both companies. pic] Source: www. xe. com The graph above shows that the Rand has been strengthening relative to the US Dollar from 1USD:10ZAR to 1USD:6,3ZAR between March 2009 and May 2011. The strong rand has had a favourable impact on our terms of trade as can be seen from the self-explanatory graph below which depicts the Balance of Payments. The company analyses below reveal that SABMiller exports and imports a number of its brands across the world. Rainbow Chicken imports the soy component of its chicken feed wholly from Argentina.

The rand’s strength impacts on both companies’ performances (and hence) their share prices favourably. [pic] [pic] Source: www. resbank. co. za The South African Environment Domestic interest rates [pic] Source: www. resbank. co. za The graph above shows that the Reserve Bank’s stance to monetary policy has been expansionary. This is shown by the gradual decline in the repo rate from 9,5% in March 2009 to its current level of 5,5% in May 2011. The Reserve Bank’s mandate is to keep the inflation rate within its target band of 3% to 6% and it uses the repo rate as the instrument with which to impact inflation.

The Reserve Bank’s lowering of the repo rate is due to the CPI breaching its upper target limit of 6%. This is shown in the graph below. There is a positive relationship between the repo rate and CPI. It stands to reason, therefore, that the gradual lowering of the repo rate would be accompanied by a decline in the CPI rate. This is indeed the case. However, because of lags, the effect of a fall in the repo rate on the inflation rate is not reflected immediately and the CPI remains significantly above the upper limit.

A fall in the repo rate eases pressure on consumers by raising their disposal incomes since they, theoretically, spend less on their credit commitments. All things being equal, this would raise the sales volumes of SABMiller’s and Rainbow’s products. Domestic Inflation [pic] Source: www. statssa. gov. za The graph above depicts the trend in inflation. It is clear that although the inflation rate has been on a downward trajectory (following the lowering of the repo rate) it was in breach of the upper limit of 6% from March 2009 to Oct 2009.

It was within the target band in November 2009 but breached the upper limit again between December 2009 and February 2010. The latter breach is attributable to the market’s inflation expectations because of the steep increase in electricity tariffs during this period (www. eskom. co. za). As mentioned previously, the biggest components of South Africa’s CPI basket are food and fuel and the graphs below will be used to explain the impact of inflation on SABMiller’s and Rainbow’s performance specifically. CPI indicator relevant to SAB Miller pic] Source: www. statssa. gov. za This graph shows that inflation for alcoholic beverages has not only been consistently higher than the upper limit of the inflation target band, it has also been significantly higher than the country’s inflation rate. This is due to the fact that a major component of the price of alcohol is a “sin tax”, which is imposed by the finance ministry, because of the relatively inelastic nature of the price elasticity of demand for alcohol as well as irresponsible and excessive consumption patterns.

For some consumers, even a sharp increase in the price of alcoholic beverages does not result in a fall in the quantity demanded. There would, in all likelihood, be a shift away from the consumption of relatively more expensive alcoholic beverages towards relatively cheaper alcohol – not a complete cessation in the consumption of alcohol. This is one of the reasons that SABMiller’s share price has shown steady gains relative to the market. CPI indicator relevant to Rainbow Chicken [pic] Source: www. statssa. gov. za Consumer food price inflation decelerated sharply from December 2010.

It is also interesting to note, that between January 2009 and January 2010, the prices of wheat fell by 24,58%, maize by 22,57% and sunflower seeds by 18,49% (www. finweek. co. za) Decreases in the prices of these staple foods has a positive impact on the poor as they spend 33,4% of their incomes on food; versus the rich who spend a mere 2,6% of their incomes on food. Poor people consume relatively more chicken than red meat because the latter is relatively more expensive. Chicken is the cheapest form of protein in South Africa and demand for it is high (www. astralfoods. com).

Furthermore, the above staple foods are used as chicken feed which is a significant input cost for Rainbow Chicken, therefore the company has had cost savings because of bumper crops and the consequent price decreases in these commodities. The table on the following page clearly accounts for the nearly vertical decline in the graph above which shows food price inflation. [pic] Source: www. resbank. co. za GDP – South Africa [pic] [pic] Source: www. statssa. gov. za The graphs above show that South Africa was in a recession in 2009, as defined, because of the two consecutive quarters of negative GDP growth.

Our recovery from the global recession was due to the fact that we had a low exposure to the sub-prime market crisis that was responsible for the global meltdown. Our banking and macroeconomic policies remain robust. The growth in the economy from the third quarter of 2009 is also due to infrastructural investments that were made for the 2010 Soccer World Cup as well as South Africa’s contributions to the BRIC emerging markets bloc – especially our trade with China. It is expected that our formal inclusion to the BRICS nations since April 2011 will maintain the upward trend in GDP (www. lobalsherpa. org). Positive GDP growth has a positive impact on the performance of SABMiller’s and Rainbow’s shares. In a boom everyone does well. SABMiller, in particular, has a presence in all five BRICS nations and is poised for growth as emerging market economies have overtaken developed economies in their contributions to global GDP. We now examine SABMiller’s share price in more detail and then turn our attention to Rainbow Chicken in light of the foregoing discussions on the global and local environments. Analysis of SABMiller pic] SABMiller is a global operation covering 75 countries on six continents and employing over 70 000 people. Its portfolio of businesses is divided into six regions and is well balanced between developed and emerging markets. Between them, the businesses produce over 200 different brands and sell 213 million hectoliters of lager a year. Since listing on the London Stock Exchange 10 years ago the company has grown substantially and has a market capitalisation of ZAR 419,837,700,000 on the JSE and GBP 36,099,310,000 on the LSE.

The company’s markets range from developed economies such as the USA to the fast growing BRICS economies (SABMiller Annual Report, 2009). SABMiller is also the number one bottler of soft drinks for The Coca Cola Company. The breweries market can be seen as oligopolistic in nature since SABMiller and its three main competitors (Heineken, Anheuser-Busch InBev and Carlsberg) are the dominant players in the market and have significant market share amongst them.

The oligopolistic market structure has a positive impact on the company’s operations and share price performance. In North America, SABMiller (through its strategic partners) is the second-largest brewer in the United States and owns nearly 30% of the US beer market. In Latin America, it is the number one brewer by market share. In the majority of the ten European countries in which it operates, the company is the number one or number two brewer by market share. The same holds for Africa and Asia.

In the 2009 annual report Mayer Kahn, the Chairman of the Board, stated that the global brewing industry was expected to continue to consolidate and that participation in industry consolidation provides opportunities to enter growth markets and to create value from scale benefits. The graph below shows SABMiller’s share price relative to its three main competitors. It is clear that all four companies’ trajectories have moved in tandem but Carlsberg’s share price has significantly taken the lead with SABMiller in second place.

At the turn of the century, the top 10 brewers accounted for just over one-third of global beer sales volumes. The past decade has seen a rapid consolidation, resulting in the top four brewers – Anheuser-Busch InBev, SABMiller, Heineken and Carlsberg – accounting for almost 50% of beer sales volumes and up to 75% of the global profit pool. (SABMiller Annual Report, 2010) [pic] Source: www. heineken. com Mr Kahn attributes the company’s good results (in both 2009 and 2010) to the operational strengths of the businesses and the power of their leading local brands.

He concedes that even though SABMiller was not immune to the global crisis, beer is a fairly resilient product which placed the company in a better position than many to weather the storm. He goes on to say: “Thanks, partly, to our long experience of emerging markets, we are used to operating under difficult conditions. If we look back ten years to our London stock market listing, it is worth remembering that the Asian currency crisis at that time had shaken investor confidence in emerging markets and that the outlook was far from encouraging.

Nevertheless, we prospered and grew and achieved the international expansion that our listing was intended to facilitate. Ten years on, our geographic spread is proving to be an advantage in that different countries are affected by the crisis at different rates and to differing degrees. So while demand in Europe has dropped sharply, countries in emerging markets such as Africa and Asia have fared relatively well despite falling back from the high – one might say unsustainable – rates of growth of recent years. ” SABMiller Annual Report, 2009

In short, SABMiller’s diverse spread of businesses, strong market positions, and a portfolio of leading brands mitigated against the risks and negative consequences of the global downturn and contributed to the steady upward momentum in the share price. In response to the mismatch between the supply of, and demand for, certain brewing and packaging raw materials in Africa, the company is increasingly using locally grown crops such as sorghum and cassava to produce affordable brands. This is done to minimise supply shortages and the price volatility of key raw material inputs.

Continued robust pricing and productivity enhancements offset increased commodity costs (SABMiller Annual Report, 2010). It comes as no surprise, therefore, that the combination of the above factors resulted in a steady upward trend in the company’s share prices on both the London and Johannesburg bourses in the period under review as seen in the graphs below. [pic][pic] Source: www. sabmiller. com In 2010, Mr Kahn had similar good news for investors, citing the same reasons as for 2009. However he mentions the company’s management team as being a key contributor to the positive results: This year, in addition, we have benefited from management’s ability to reduce costs and selectively increase prices in order to maximise revenues…” Source: SABMiller Annual Report, 2010 In the third paragraph of our Executive Summary, we mentioned that the management of any company is not responsible for the share price. However, in fulfilling its primary objective of maximising shareholder value, the credibility of and strategies employed by management invariably have an impact on the share price. It would appear that the management and directorship of SABMiller are market-friendly.

The members of the executive team are representative of each of the continents in which the company operates; with Mr Cyril Ramaphosa and Dr Dambisa Moyo as the notable representatives for Africa. Other market-friendly strategies include the December 2009 announcement that 8. 45% of the shares in SABMiller’s South African subsidiary, The South African Breweries Ltd (SAB), would be placed under Black ownership as part of its commitment to Broad-Based Black Economic Empowerment in South Africa. This transaction created 40,000 new shareholders among SAB employees and qualifying retailers.

The deal also created a charitable foundation that holds 18% of the shares that were issued under the transaction. The dividend income will be used for the benefit of the wider South African community (SABMiller Annual Report, 2010). The company also capitalised on the strength of emerging markets (particularly in China and Africa) by channeling its growth strategies to these markets. “Globally, the beer market grew by 1. 5% in 2010, led by a continuing strong performance in Asia, Africa and Latin America. China grew by 6. 5%, Africa by 3. 1% and Latin America by almost 3%.

Western Europe continued the trend of declining beer volumes, driven by a shift in consumption to other beverages and the decline of on-premise consumption. ” Source: SABMiller Annual Report, 2010 In the 2010 financial year the company acquired four new breweries in China, invested in new breweries in Tanzania, Mozambique, Angola and Southern Sudan and carried out expansions and upgrades in Uganda and Zambia. The trends in the graphs depicting SABMiller’s share price on both the London and Johannesburg Securities’ Exchanges (given above) require no further explanation.

With good management being both a contributory factor to and a consequence of the share’s strong performance, it is reasonable to conclude that the positive momentum will continue. [pic] Analysis of Rainbow Chicken [pic] Rainbow Chicken Limited is the largest processor and marketer of chicken in South Africa. It is a fully integrated broiler producer that breeds and rears its own livestock which it feeds from its own feed mills. Rainbow processes, distributes and markets fresh, frozen, value-added and further-processed chicken. The company has a market capitalisation of ZAR 6 124 893 000 009 was a very challenging year for the South African poultry industry, both locally and globally. The local chicken industry was negatively impacted by the fall in demand due to the recession. An oversupply by local producers and increased imports due to the strong rand also added to the industry’s woes. These difficult market conditions were a further test of Rainbow’s differentiated brand strategy, which through its foodservice and consumer brands, seeks more consistent, profitable and sustainable business (Rainbow Chicken Annual Report, 2009). Despite these challenges, Rainbow managed to deliver an acceptable overall performance.

Positive performance, like a rally in the share price, is a function of several variables and while we can make inferences about the correlation between the two, we make no such inferences about their causality. Like SABMiller, Rainbow’s Black Economic Empowerment transaction (which was concluded in July 2008) was market-friendly and boosted the company’s share price. Rainbow provided vendor financing for a 15% equity stake that was issued to a consortium that was constituted by its employees, Imbewu Consortium, Ikamva Labantu, and Mrs M Nhlanhla, a non-executive director. The BBBEE transaction resulted in the share price rallying from R12. 0 to R16. 80 in the latter period of the second quarter of the 2009 financial year as shown in the graph on the following page. 2010 was an equally challenging year for Rainbow but its effects were mitigated by South Africa’s steady recovery from the recession, a lower interest rate and inflationary environment. Maize prices declined since their peak in July 2008. The global financial crisis caused a dramatic decrease in the demand for maize, improving the previously dangerously low US and global maize stock situations to such an extent that international prices fell sharply from their record levels. Rainbow Chicken, Annual Report, 2010). The fall in maize prices, which is a major component in chicken feed, resulted in a reduction in the company’s input costs which boosted the bottom line. Local producers added significant production capacity for wheat, grain and soy over the past five years. Rainbow imports the soya component of its chicken feed from Argentina and it has a significant FOREX exposure. The strong rand, however, in the period under review, has been in the company’s favour. The company’s 2010 annual report reflected acceptable profit margins.

In both 2009 and during 2010, the company’s share price maintained its upward momentum as reflected in the graph below. [pic] |Key Features – Rainbow Chicken Share Price | |Year |Low |High | |2009 |11500 |16800 | |2010 |15900 |16900 |

The graph and table above confirm the findings in the preceding paragraphs. Although the difference between the year’s highest share prices is negligible, South Africa’s economic recovery may be gleaned from the fact that the lowest share price for 2010 was 4400c above the 2009 low. Consumer’s disposable incomes were higher in 2010 because of falling interest and inflation rates. Falling input costs and increased consumer demand increased the appetite for the company’s shares as investors’ expectations of earning better returns were supported.

Other events that led to sharp movements in the company’s share price include the market’s speculative expectations immediately prior to the announcement of the group’s 2009 results. After the results were announced, the share price dropped to R13. 90 because of the 39. 6% decline in headline earnings. The reason for this decline in earnings can be attributed to the company’s policy of buying feed products forward. The share price stabilised for the remainder of 2010 due to an increase in the multitude of families that joined the ranks of South Africa’s middle class.

As the middle class grows in size, so the taste of chicken diversifies allowing entrepreneurs to come up with new ways of marketing chicken to end consumers. We now turn our attention to Rainbow’s competitor, Astral Foods, to get a better idea of the South African poultry industry before making conclusions about how justifiable a continued rally in Rainbow’s share price is. Astral Foods is Rainbow Chicken’s nearest competitor. The company holds investments in subsidiary and joint venture companies.

Its primary activities are animal feed pre-mixes, the manufacturing of animal feeds, broiler genetics, the production and sale of day-old broiler chicks and hatching eggs, integrated breeder and broiler production operations, abattoirs and the sale and distribution of various key poultry brands. Its current market capitalisation is R5,5 bn (www. moneyweb. co. za) Despite a 5% drop in sales volumes, revenue for Astral Foods’ poultry division increased by 13% for the 2009 financial year. (Astral Foods Annual Report, 2009).

The market was neutral about the appointment of Chris Schutte as the Chief Executive Officer, effective 1 May 2009. The share price was also not responsive to the appointment of Daan Ferreira as the Financial Director. This may be because it was not perceived to be mindful of BBBEE. The improvement in Astral Foods’ revenue for the 2010 period was largely attributable to a sustained growth in volume. The volume growth was on the back of improved production results supported by better poultry health status.

Depressed consumer spending, together with higher levels of imports and high local stock levels, contributed to vigorous promotional activity with prices at levels below historical levels. Reduced feeding costs during the period countered the effects of lower poultry selling prices. A lengthy period of industrial action at Earlybird Standerton negatively impacted the company’s share performance. (Astral Foods Annual Report 2010) |[pic] | |The graph above shows the steadily upward trend in Astral Foods share price.

Not surprisingly, it follows a similar pattern to Rainbow | |Chicken’s share price – with pronounced sell-offs in the first and second quarters of 2009 and improvements thereafter. This pattern | |provides comfort because of the consistency of both company’s responsiveness to events in the poultry industry. It would be concerning if | |the companies had different trajectories. The consensus amongst analysts is that the South African poultry industry is poised for | |significant growth given that the price of chicken has risen by 30 per cent year-on-year while the cost of feed has come down.

We | |anticipate that Rainbow’s share price will maintain its upward trend. | | | BIBLIOGRAPHY 1. Astral Foods Limited Annual Report, 2009. www. astralfoods. com 2. EIA Independent Statistics and Analysis, US Energy Information Administration, www. eia. doe. gov 3. www. eskom. co. za 4. www. finweek. co. za/Economy/Food-inflation-still-a-concern-20100301 5. www. globalsherpa. org/china-africa-brics 6. www. heineken. com 7. www. moneyweb. o. za 8. Rainbow Chicken Limited Annual Report, 2009 and 2010, www. rainbowchicken. co. za 9. Reserve Bank Quarterly Bulletin March 2011,www. resbank. co. za 10. SABMiller PLC Annual Report, 2009, www. sabmiller. com 11. SABMiller PLC Annual Report, 2010, www. sabmiller. com 12. Statistics South Africa, Statistical release P0141, www. statssa. gov. za 13. www. xe. com [pic] ———————– Economics Assignment 2011 GLOBAL ENVIRONMENT LOCAL ENVIRONMENT INDUSTRY / COMPETITORS COMPANY SHARE PRICE

I will be only talking about the first part of the article ” China commodity imports soar despite high costs” Identify economic concepts (vocabulary words) that explain content of article Demand for oil and copper Purchases of other commodities imports of inwrought materials raise retail fuel prices China’s crude imports will remain high in the upcoming months as oil firms still have a strong incentive to produce raise crude throughput to a new peak this month to meet rising domestic fuel demand trade deficit in March

• What do you think about what is happening? Good or bad for consumers? In the long run? What is happening right now might be seen as a positive situation for the consumers. They are creating a large demand for fuel and the price hasn’t increase yet so they are taking advantage of the lower prices they are getting.

However, in the long run this is not going to be very beneficial for the consumers due that they might be near to face a scarcity and the retail prices are going to increase which will then lead too rationing of goods. Outline Main idea (1 50 words) What is the article about? High demand for crude oil which leads to a high increase in imports (4. 95 million barrels per day) Not only oil but as well: alumina, iron ore, steel, and rubber Possibility of raising retail price Fuel supply is increasing to meet the demand level .

Demand and supply

The leftward shift of the supply curve means that for any given price, less is supplied. This creates excess demand at the original equilibrium price, which puts upward pressure on price. Producers receive the signal to increase their prices and they do. Import demand vs. Export supply 0 curve) Rationing vs. incentive: Price floor & price ceilings: Mention specific points and lines in the diagram Analyze beyond the diagram (100 words) How might what is happening in the diagram not fully explain the article?

In first place the article touches upon the demand of oil but never leads to what happens with the supply and we need to take into account what happens with both because hey are part of the same graph. Then it doesn’t go further to what happens when a price floor is implemented (when the article says “retail prices might increase”) so therefore the graph will explain further what happens with both sides (consumer and producer) in a situation like this.

The J curve will be necessary because this goes further into explaining how china became a exporter when it was an importer and gives Are there are other parts of economic theory that could augment your explanation? Does the article fully match what theory would predict? Evaluate a solution (300 words): pick one or two issues on which you can provide an opinion supported by evidence (use quotations/references). Evaluate the solution mentioned in the article (I. E., a policy response) or suggest one

What are the limits of the theory?

What are the arguments for or against the solution proposed? Did the person make a good decision? What predictions can you make about long run outcomes? What is the impact on different stakeholders? Can you consider another point of view? What are the pros and cons of this issue? What are the short and long-term implications? Weigh the costs and benefits of an action or policy. China commodity imports soar despite high costs Throughout this essay we are going to analyze the first part of the article “China Commodity Imports Soar Despite High Costs”.

The article starts by describing the current situation in China regarding crude oil prices and other non-worked materials. We are able to analyze that there is a high demand for crude oil (and alumina, iron ore, steel, rubber) that has Just reached the 4. 95 million barrels per day. This high demand is due to the low prices that China is offering the fuel for and a possibility of easing the retail price is closer due to the impossibility to satisfy the demand with price changes the demand will also change.

However, thanks to this increase in demand, China went from being an importer to the point in which was able to become an exporter.