Source: The Standard Author: Jeffrey Tam 07/14/2008
Subject Concerned: Opinion Airlines Aviation Fuel
It looks like there will be no silver lining in sight for airlines as well as steel and oil producers as world crude prices hit a record US$147 a barrel on July 11 in the wake of tension between the West and Iran and troubles in Nigeria's oil-rich region.
Air China and Cathay Pacific have seen their share prices plunge 39 percent and 15 percent respectively over the last two months amid soaring jet fuel costs.
But the worst has yet to come, according to investment bank Cazenove.
"This would be more severe than the loss suffered [by Cathay Pacific] during the Asian financial crisis in 1998," said analyst Andrew Au, slashing Cazenove's Cathay's target price to HK$10 from HK$13.50.
Au said Cathay may report a loss of HK$1.6 billion this year. It would be its first loss in 10 years.
Even Tony Tyler, Cathay's chief executive, said last week the oil spike had dealt a blow to the airline more devastating than the impact of the SARS outbreak in 2003.
Skyrocketing oil prices have also battered Aluminum Corp of China (Chalco) as production costs have soared. About 40 percent of the cost of producing aluminum is taken up by energy, so the recent hike in oil prices has substantially shrunk margins of companies like Chalco.
"The worst [is] not over yet," said Deutsche Bank analyst Julian Zhu in a report last month. "We anticipate more energy price hikes later this year, [and] we expect Chalco's margins to be further squeezed in the second half."
The bank slashed its earnings estimates for Chalco by 23 percent, urging investors to "sell" and setting a target price at HK$8. The Chalco share price has fallen 30 percent to HK$9.36 over the last two months.
Oil firms in the mainland are not benefiting from surging prices as regulations compel them to retail oil at lower prices. So should investors be holding cash in a market where no stock is worth buying?
Not really, because holding on to cash will make you poorer in the long run as inflation eats up its value.
The best alternative for now, according to experts, is to invest in bonds.