How to try and survive a commodity market crash with a smile on your face

Anyone who works in a cyclical industry such as oil and gas, mining or any other commodity based business is familiar with the empty feeling that grows in your stomach when it becomes clear that we are entering a market down cycle. Even non-cyclical industries can enter into crisis, but the commodities sector all too often have low prices, and the resulting lower levels of employment tied directly to slowdowns in the economy in general. When a single company, or small sector enters into a crisis, people can shift over to other companies or industries more easily then when there is a massive reduction in a major commodity sector like oil and gas.

Today we are living through a crisis not just in petroleum based activities, but the depth and length of this downturn is creating a major crisis in many areas of the world. Some estimates put the jobs lost at over 2 million to date. Areas like Houston, Texas, and Calgary Alberta are some of the hardest hit and stories are starting to surface of people walking away from their homes and mortgages and massive unemployment. And in markets like these, where oil provides such a large proportion of jobs, it can be very difficult to relocate into other industries.

There have been a number of major downturns in oil price. Some driven more by perception and economic activity in the economy as a whole, like 2009, and others more drawn out and sustained, like the mid 1980’s, when a fundamental oversupply problem took years to work its way out of the system.

When we start to see the early signs of a crisis. Normally the market stays in denial for some time. “The price will recover”, “this can’t go on for very long” or “OPEC will cut production and everything will return to normal” are things that were heard often during the middle of 2014. Now that it is apparent that this downturn is going to go on longer than we would like, people start to get angry, blaming others in this case, OPEC, and in particular the Saudi’s have recently been the most frequently sighted causes of this problem. Now that we are all realizing that the downturn is a function of global oversupply, and that the massive increases in efficiency globally is delivering more oil to the market that the world can effectively consume we are entering the phase of acceptance. There is no quick fix, we need to allow lower levels of investment to slowly trim back the amount of oil coming out the ground, and allow global economic growth to increase demand enough that demand and supply come back together. Only then will prices recover sustainably.

Virtually everyone even loosely connected to the industry has an opinion on what will happen with the oil price. There is a bad joke in the industry that the only reliable indicator of price is that when everyone says it is going up, it will crash, and that when everyone says it can never recover, it will. The reality is that predicting the price of any global commodity, and in particular one with the level of consumption as large as oil and gas is very difficult. Not only are there thousands upon thousands of factors to consider, there is an amplifying effect in many of them that is even more difficult to assess. Small errors in estimates, which are required whenever someone is making a prediction, can have an effect which is multiplied making a small error the source of a very large mistake. An as example, small differences in assumption of the refining capacity of China, can have a direct impact of gasoline and diesel pricing in the country, which in turn can have a large impact in the general consumption demand numbers in the country. At each step, an analyst has to make an estimate, and at each step a small error can magnify the error at the next step.

So what can we do to survive a downturn? The most important thing to do is remain confident. It is very hard to maintain focus when we are worrying about losing our job. But we need to try to stay focused on performance, and we need to communicate. Communication is always important, but even more so in tough times. In 2008, and 2009, I was growing a small services company in Latin America. By the time the financial crisis hit, we were in trouble. I gathered up my management team and I talked to them. I told them that by any financial measure you wanted to pick, net debt to EBITDA, Debt Service Coverage Ratio or whatever, we were bankrupt. But that if we put our heads down, worked even harder than we had been and worked together as a team, maybe, just maybe no one would notice that we were bankrupt and that we would get through it. I also invited them to come up with creative solutions. That is what led us to open a new market, in Peru, in the midst of a major crisis. Most companies rein their expansion plans in when the times get tough, but moving into a third country in the midst of the crisis is part of what saved us. I also spent even more time than usual talking to our stakeholders – unions, investors and our key staff, amongst others, about our plan. Convincing people that we had a viable plan to survive was key to keeping everyone focused on finding ways to keep the company alive and not distracted thinking about if they were going to lose their jobs, or lose their investments. This strategy paid off, we got cooperation from corners we never expected, ideas from employees that generated real intrinsic value and developed a relationship with our investors that had them measure us and treat us more than fairly. As a direct result of outperforming our competition and the market as a whole, our investors helped facilitate to take the company public in 2010, and we were off on a journey to become the employer of 2000 people in 7 countries. Sometimes you need to smile and give everyone a vote of confidence right at the moment that it is the most difficult to do so.

Recommendations to survive a crisis

• Communication is paramount
• Have a real plan on how to navigate the down cycle, and spend a lot of time communicating it
• Keep staff motivated and focused on generating value for the company, not worrying about losing their jobs
• Be open to out of the box ideas. Instead of thinking that you cant handle those ideas due to the crisis, look at it that you have extra time and people to evaluate ideas then when the company is hell bent on growth
• Talk to investors, staff and other stakeholders, often. Be honest, but be confident

Its never easy, but good leaders inspire when times are tough.

 Warren Levy Feb 23, 2016