At the end of 2018, Halcyon Agri Corporation Limited was 8 years and 8 months old.
Looking back, we acquired our first two factories in 2011, and the immediate focus thereafter was on
synchronising the processing operations with our risk-averse marketing model, and, that being done, listing
the company on SGX in February 2013. Following that, we expanded our operations both geographically
and along the value chain. By the end of 2015, we owned 14 factories, our first greenfield rubber plantation
project, and the beginnings of a global distribution network. In our second big growth push, 2016 saw us
embark on our most ambitious project to date, the acquisition of Sinochem’s global natural rubber business,
which included the privatisation of GMG Global Ltd. In 2018, we rounded off our Indonesian portfolio with
the acquisition of another five factories, and made a final addition to our global distribution business –
by now the world’s leading – towards the end of that year.
Halcyon Agri now owns and operates 38 factories, employs over 17,000 people in 35 countries and owns
plantations covering more than 100,000 hectares (of which 40,000 are planted).
In 2018 we became the
biggest supplier of dry rubber and latex globally, with an aggregate delivered volume of 1,432,335 mT.
Taking stock, it seems that 2018 was an important year not just for our group, but also for many facets of
the global economy and perhaps even for civil society.
Several geopolitical and societal developments
strike me as being of particular significance:
-
- The U.S. will not cede its position as the world’s leading economy to China without a fight
- Income inequality within developed economies is producing irrational outcomes at the ballot, and
the ever-widening wealth gap between frontier and developed economies has unleashed migratory
forces that potentially threaten the World Order
- Climate change is upon us regardless if politicians and world leaders are prepared to acknowledge or
to deal with it
The ongoing tariff dispute between the U.S. and China is a testament to the first point. While there is
much political posturing, the strategic rationale for the tariff conflict may well lie in two ideological
and systemic differences.
Firstly, most post-war U.S. administrations have engaged in global interventionist policies, while China has
continued to pursue its policy of ‘non-interference in the domestic affairs of other countries’. Secondly, the
American conviction is that government stays out of the business arena, while state-owned enterprises in
China account for 30%-40% of Chinese Gross Domestic Product (GDP).
Several decades of pursuing these policies have resulted in imbalances that endanger the friendly
coexistence of the two most successful political and macroeconomic systems since World War II.
In an apparent paradox, the U.S. can lay claim to the world’s most thriving economy on one hand, and the
most indebted government on the other. The National Debt is due, in no small part, to the U.S. providing
global security and military support services in the name of upholding the democratic order. In current day,
the United States government has become the world’s largest debtor, relying on the world’s largest
creditor and its principal lender, China, to provide continuously increasing amounts of funding. Hindsight
suggests that this was a tenable situation so long as the American economy was much bigger than the
Chinese economy in absolute terms, but the last two years have seen increased friction between the world’s
leading economic superpowers.
The key driver of the American economy has always been innovation and creativity, both of which require
robust safeguarding of intellectual property (IP) to deliver a sustained competitive advantage. At the point
in time where China’s GDP is threatening to eclipse that of the U.S., Chinese infringement of American
IP has become the battle-cry for a critical mission:
defend the economic status quo, with all else up for
renegotiation. Adding further pressure to the American economic outlook, Chinese state-owned enterprises
(SOE) have been on a global acquisition spree, cleverly navigating the
laissez-faire capital markets of the
West to gain control of strategically important technologies, raw materials and market access.
The inevitable American response, such as the imposition of trade tariffs, more stringent CFIUS intervention
in SOE-driven mergers and acquisitions, and intensified U.S. efforts to denuclearise the Korean peninsula,
has increased
global volatility and taken over the centrestage of global newswires.
Much has been written about income inequality, not only within the U.S. and Europe, but also between
regional neighbours such as the European border states and the Middle East North Africa (MENA) region. A
deep sense of disillusionment seems to have taken hold of large parts of the developed world, leading to
irrational outcomes at the ballot box and, as seen recently in France, demonstrations and street protests. The
migratory forces originating from the MENA region into Europe are a source of much anxiety for large tracts
of the European Union (EU) population, and threaten the prevailing mindset of tolerance and acceptance.
As to my third point on climate change: At the 2018 World Economic Forum (WEF) in Davos, Sir David
Attenborough, famed broadcaster and natural historian, warned that human activity has brought about the
end of climatic stability. To quote:
“If people can truly understand what is at stake, I believe they will give
permission for business and governments to get on with the practical solutions. Get it right, and humans
can create a world with clean air and water, unlimited energy and sustainable fish stocks, but only if decisive
action is taken now.” A WEF survey taken just prior to the event showed that
environmental threats are
now the biggest danger to the global economyi.
How do these developments impact Halcyon Agri and the global market for natural rubber?
The outlined shifts in geopolitical agendas and voter consciences may well bring to an
end this current
era of Globalisation. Instead, key indicators point towards a resurgence in national security awareness, for
instance of the high risk of a supply disruption for a raw material of significant economic importance, such
as natural rubber. In September 2017, the European Commission identified natural rubber as a
critical raw
material for the European Unionii .
Furthermore, an inconvenient, but very real truth is that the technology and low-interest-rate driven
economic cycle of the last 10 years has failed to deliver a sustainable price environment for key crops
such as natural rubber. While global asset prices and capital market pricing benchmarks have doubled,
even trebled, rubber prices have tumbled. Farmers who planted rubber trees during the high-price period
of 2005-2011, have had to realise that this has been a poor investment, thus far.
Without exception, all
origins of natural rubber have experienced significant consumer price inflation (CPI) over the last 10
years, which has caused labour costs to more than double in Indonesia, for example. This is in stark contrast
to the FOB price of natural rubber, which remains locked 40% below the 10-year average price!
