BEFORE last week Cameron International was best known as the maker of the faulty piece of kit that was partly responsible for BP’s disastrous 2010 oil spill in the Gulf of Mexico.
Last week it became the latest corporate domino to be knocked over by the plunging price of crude oil. The Houston-based producer of blow-out preventers and other drilling equipment agreed to sell itself for $14.8bn to Schlumberger, the world’s biggest oil contractor.
At more than $66 a share, the bid represented a 56% premium to Cameron’s price the day before the announcement. A year ago, however, the shares stood at more than $74. Much has changed — and not just in the oil industry.
A rout in the prices of raw materials, from copper to coal and iron to oil, has blown holes in balance sheets and crushed business plans. The collapse has been driven largely by worries about China, the biggest consumer of a number of commodities. Its unprecedented expansion of the past decade appears to be slowing to a more pedestrian rate as it builds fewer cities and power stations.
Gone are the days of 10% growth in gross domestic product. An annual rate of 5%, or even lower, is more likely as industrialisation shifts towards consumption: there will be less tarmac and more cars, fewer apartments but more refrigerators.
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That spells trouble for the commodities sector.
A decade ago China caught miners and oil producers flat-footed. Having invested little in new mines and oil exploration in the preceding years, they were swept up in a boom driven by a sudden scarcity of supplies. Companies such as Glencore and BHP Billiton, Shell and Exxon, saw their share prices soar as materials prices jumped to record levels. Oil hit $147 a barrel, iron reached $205 a ton, and coal soared to $140.
The industry’s response was logical. Companies poured billions into new projects to feed the Chinese beast.
The problem is that those projects, sanctioned years ago, are coming online just as the biggest buyer needs a lot less of what they are producing.
The price collapses have been brutal. In the past year oil has plummeted more than two-thirds. So has iron, the main ingredient in steel. Coal has dropped to $64 a ton, down nearly 60% from its peak in 2011.
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Hence, mergers of expedience, such as the one announced last week. In the six months to the end of June, Cameron recorded a 40% drop in profits. Its larger rival Schlumberger suffered a one-third drop. Ramming the two together will allow the combined company to axe thousands of jobs and rip out an estimated $600m in costs.
Those savings will be needed to ride out the downturn. Services companies, which lay the pipelines, build the platforms and drill the wells for oil companies, are the canaries in the coalmine. When the giants slash billions from their spending plans, they bear the brunt of it.
One need only look at the North Sea, where exploration has all but come to a standstill, leading to thousands of redundancies over the past year.
The miners will continue to suffer mightily as well. Glencore’s shares have plumbed new depths thanks to its huge debts and heavy exposure to materials such as copper. The 148p closing price on Friday valued the company at £19.7bn, just short of the price it paid just two years ago to swallow up the coal giant Xstrata.
Anglo American, once the largest mining company in the world, is now worth £10.4bn, a drop of 80% in four years. Its problems are magnified by its exposure to South Africa, where its substantial platinum operation is struggling with plunging prices and labour disputes.
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The falls represent value destruction on an epic scale. There may be more to come. China, the world’s second- largest economy, is a black box. No one can predict how steep, or lengthy, the deceleration will be.