The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Q&A with EBRD: ‘Real bargains in the current market’

In an interview with Critical Resource, Riccardo Puliti – who heads the European Bank for Reconstruction and Development’s (EBRD) investments in power, energy and natural resources – predicts that 2016 will be a challenging year, but that opportunities remain in some key sectors and geographies.


2016 will be a difficult year, but there is light at the end of the tunnel for copper and gold

Riccardo Puliti EBRD

Riccardo Puliti, EBRD head of power, energy and natural resources

“The year ahead will certainly be difficult for oil and gas. Prices will remain very depressed, probably in the area of $30-40. Many companies are reigning in their capital expenditures and dividends; what funds there are will go to those fields and wells that can produce at very, very low costs. This will of course have negative impacts on revenues and growth in countries whose economies are reliant on commodities exports – there will be far fewer revenues and far less growth. In the mining sector the trend towards very low prices started a few years ago. As a result mining is a little more advanced in the cycle and with better prospects than oil and gas.

Companies which have been financially prudent over the past few years will now have the capability to access real bargains in the current market. The companies that have been able to enter the cycle with a low gearing ratio (the ratio of long-term debt to equity) will find themselves with opportunities to acquire very interesting assets from companies that need to dispose of them. However, it will continue to be a very selective market.

Copper is the most resilient mining commodity in this environment as a large number of low-grade mines have closed due to high production costs. Therefore prices may rise despite the fact that demand will very likely be flat. Gold is another metal for which the outlook is better than most, especially in a context where interest rates are low. Other commodities are likely to suffer more from the decline in demand.”

The most prospective countries for investment in 2016: Turkey, Morocco, Serbia…

“Turkey, post-elections, is likely to see renewed interest from investors. There remains a certain degree of political risk, but not at the same level that we had between the two elections in July and October. It is a very interesting market – very big. The demand for energy and other goods is important and I think it will always receive attention.

Morocco is another interesting and stable market but it is also very competitive so you risk buyer competition driving up the price for your assets. You always have to look for opportunities where the risk is manageable but you are not overcrowded.

Serbia is also a jurisdiction that can support investments in the mining sector among others. It is quite stable and it is not far from the main market of the EU. Of course individual transactions will depend on the quality of the assets: the grading, production costs and the price of the given minerals.

I also see a lot of interest from both Western companies and Chinese companies in the former Commonwealth of Independent States (CIS), especially Kazakhstan. China’s One Belt One Road policy [an initiative that focuses on connectivity and cooperation among countries in Eurasia], is significantly boosting the investment environment through improvements in infrastructure and trade ties.”

Renewables are on the rise, gas will be the bridge and coal will decline

“Public support for renewables is still very high despite the upward pressure they put on energy prices, meaning there will likely continue to be significant investment in the space. However, because renewables generation is intermittent (often depending on weather conditions), we’re going to need a back-up fuel until new power-storage technologies become available. From the EBRD’s perspective, gas is the best available bridge fuel. It’s both cleaner and far more flexible than coal.

In the energy sector everything has to be done in a balanced manner. When you consider financing energy generation you always have to take into account three main pillars: climate change, energy security, and affordability/competitiveness. Since 2013 the EBRD’s policy has been to not finance coal-fired generation except in rare cases where there is no alternative. It will take many years to change the world energy mix but the decline of coal is a trend that we will see more and more.

Above all, the EBRD will continue to restructure power plants which can yield very important energy efficiency gains. Energy efficiency is key for us, I cannot stress that enough. Our investments in the manufacturing sector are always undertaken with an eye on energy efficiency. From our perspective, the demand side is as important as the supply side. I would say that above all the star investment areas in 2016 will be transmission and distribution. They are the kind of investments which can give good and safe returns in a context where interest rates are low.”

EBRD finance can be crucial when investment is scarce

“Our Natural Resource and Energy group manages a portfolio of around €10bn, providing financing that would not otherwise be available on the market. 80-85% of that is lending – usually project finance, but also corporate finance, working capital and sovereign lending. The rest is equity or equity-linked.

The EBRD’s financing has become more important for two reasons: 1) the deterioration of credit ratings in emerging markets and 2) the impact of Basel III [which required lenders to hold increased capital buffers, reducing the funds they have available for investment].

The main benefit for recipients of EBRD funding is that they gain access to the EBRD’s in-depth local knowledge and ability to manage political and regulatory risk. Furthermore by working with EBRD, companies become known for being transparent and responsible. I’ve found that the vast majority of our prospective clients are looking for that kind of credibility.”

The European Bank for Reconstruction and Development is an international financial institution owned by 64 countries and two EU institutions (the European Union and the European Investment Bank). It is currently active in more than 30 countries in central Europe, central Asia and the southern and eastern Mediterranean.