Industrials Sector Update

 

Ethiopian Airlines crash leads to the grounding of Boeing 737 Max 8 worldwide

The March 4th crash of a Boeing 737 Max 8 Ethiopian Airlines flight 6 minutes after takeoff has led to the grounding of the entire 737 Max fleet.  This was the second crash involving the 737 Max 8 in the last 6 months. Lion Air flight 610 crashed into the Java Sea 13 minutes after takeoff from Jakarta on October 29, 2018.  China was the first country to ground all 737 Max aircraft, followed by the UK, Australia, Canada, and the US. An issue relating to an anti-stall device in the nose of the plane has been linked to the Lion Air crash and recently recovered Ethiopian black boxes show the two crashes have a clear similarity.  The 737 Max is a brand new plane and had just been delivered to both airlines just months prior to the crashes. Additionally, a grand jury is looking into safety certifications involving the aircraft. The next few months will be rough for Boeing as the company will be under scrutiny from aviation authorities.   

The Max program is critical to Boeing as it accounts for approximately 590 jets valued at between $27 billion and $30 billion in revenue this year alone, representing 1/3 of total projected 2019 revenues.  A grounding of all 737 Max planes could cost the company between $1 billion and $5 billion, according to estimates from Wall Street firms Melius Research and Jefferies. Shares have dropped 12% since the Ethiopian crash.

Payments Sector Sees Another Mega-Merger

Fidelity National Information Services Inc. (FIS) agreed to acquire Worldpay Inc. (WP)  for roughly $35 billion in cash and stock. The deal will create a global giant with worldwide reach in the payment and back-office financial services sector that will allow the company to reach more customers.

FIS engages in an array of tasks ranging from storing and managing basic account information to complex back-office trading operations. Worldpay connects merchants to the networks that process credit and debit card transactions and other types of payments.

As retail banks have started to get rid of their traditional payment management services, an increasing amount of smaller, technology-driven startups has filled the void.  This has led to an increasing number of new stock-market listings, strategic takeovers and private-equity buyouts in recent years.

The combined company expects to generate $500 million in additional revenue and save roughly $400 million by combining their one-stop shop services to process online and in-store payments and manage transactions in multiple currencies. The new company expects to generate $12.3 billion in revenues.

U.S. Decision On Iran Sanction Waivers will drive oil prices

Recent discussion of oil prices has revolved around OPEC production cuts, record-breaking US output, turmoil in Venezuela, and the U.S.-China trade dispute.  However, U.S. sanctions on Iran’s oil exports will be the key factor that drives the price of oil in the coming months.

After imposing sanctions on oil imports in November 2018, the U.S. granted waivers to eight major Iranian oil clients, including the superpowers China and India, resulting in an increase in supply which drove prices down.  Benchmark Brent crude futures fell 22 percent that month and the waivers influenced an OPEC decision to agree to cuts beginning in 2019.

Looking ahead, analysts believe that the price of oil itself will play a major factor in the decision whether to extend the waivers and demand additional reductions from Iranian oil customers.  If waivers are extended, analysts anticipate that India and China will be receiving the go-ahead to continue buying oil and the US will not renew waivers to Italy, Greece, and Taiwan in order to limit the supply of oil.

Mining company Vale SA dam collapse to have a far-reaching effect on iron ore supplies

The January 25 Brumadinho dam accident in Brazil that left more than 300 people dead or missing on Jan. 25 has resulted in Vale SA cutting production at an iron ore mine in the state of Minas Gerais that has an annual capacity of 12.8 million tons.  It will also suspend operations at its Doutor dam. This is in addition to a temporary closure of its Brucutu mine and other mines in southern states, which were expected to affect 70 million tons a year of production capacity.

The news caused Chinese iron ore futures to rise by more than 3 percent to a two-week high on Monday and pushed shares of Rio Tinto and BHP, rivals of Vale, up by 1.8% pre-market on Monday.  This is Vale’s second dam disaster in the last 5 years, as the Samarco dam collapse in 2015 caused the deaths of 19 people and irreparable pollution of the entire Doce River basin.

By Vikram Chitkara - Industrials Director, Baruch IMG