Trump is Trump

Financial Analysis of Oil and Gas Market – Dec 2016
December 13, 2016
2016 In Review – Our Insights
December 16, 2016
Show all

In 2014, VCI conducted an in-depth Scenario Planning project with a Canadian mining company. We had four leadership teams each develop a possible future scenario. To the current great pleasure of all, one of the groups developed a future scenario they called “Trump is Trump.” In this scenario, they created a story covering the year Trump became president and the developments over the subsequent twenty years. They then mapped out the business options in response to what they imagined could happen. From the option set, the management team defined their strategies to deploy should the identified events actually occur.

For this, our 2016 year-end newsletter, we thought you would enjoy some insights gathered from this exercise. Especially since this particular “wild card” scenario has come about in 2016.

Theme No. 1: The economy goes into hyper drive with a strong US dollar for about five to seven years, then cools off.

A positive American economy lifts all boats and drives an increase in demand for many commodities. Many miners will not be ready for growth as they are mired in cost cutting and survival activities. Capital projects will again be launched too late and play straight with the cycle – thus build at peak costs and start producing just as the commodity prices tank. The strong dollar calls for a more proactive approach to internal currency management as exports become expensive for customers buying from the US.

Theme No. 2 ~ Increased Trade Protectionism and Trade wars.

Trade protectionism most likely will lead to tit-for-tat type trade wars because of trade imbalances and politicians attempting to gain advantage. To help shield their markets, a range of non-tariff barriers to curb imports will probably get introduced. These plays would include altering documentation requirements, classifications, delivery time restrictions, quality standards, volume measurement disputes and labeling discrepancies. Overt trade wars can then play out through an added percentage tax on imports of coal, iron ore, natural gas, crude copper and the like in response to the American trade officials attempting to balance their trade though similar customs and excise tactics. Periodic restrictions on certain commodities may occur as players rush to the bottom.

Theme No. 3 ~ Pulling back environmental and operations regulations.

The Federal Government’s relaxing attitude about compliance and new regulations help some projects, but overall the individual States pick up the slack and effective resources companies’ environmental and production standards remain at current levels. Also, the mature larger players in the industry use regulations as a strategic barrier to entry for smaller new entrants and thus actively advocate for State regulators to keep standards high.

Theme No. 4 ~ Pro-business environment includes corporate tax reductions.

With reduction of corporate income taxes in the US, companies re-evaluate their transfer pricing and move to leverage the new lower capital gains taxes. Those with capital projects ready gain substantially as they get their long-term development plans approved. To keep pace with the new evolving tax environment, companies take steps to leverage the financial opportunities of these new tax rules; they assess their operational and corporate structures, take a fresh look at their management and engage with government stakeholders – especially where tax rules threaten to change.

Theme No 5 ~ Mining innovation gets its second wind.

As the commodities market slowly picks itself up from years of bouncing on the bottom, and the fossil fuels market gets a breather thanks to policy changes, innovation accelerates to improve production capability in a more efficient and safe manner. This wave of enthusiastically embraced innovation is at risk of finding that in a buoyant economy, few external vendors are providing the needed support as they again, are stretched beyond capacity. Digitization continues to move to the front and center of the sector because of the direct benefits of vastly superior resource definition and development combined with improved asset utilization and production. We expect a rapid maturation of digital commerce and marketing. As is currently the case, leading companies continue to gain the most advantages for this transformation.

Theme No 6 ~ US introspective isolationism

Trump’s transactional approach to his presidency leads to the country turning inwards to a win-lose narrative. This promotes a shift toward isolationism that causes much harm to the US economy, citizenry and image throughout the world. Americans start seeing the world not as a place full of opportunities waiting to be harnessed but a giant rip-off.  Trump voids America’s overseas commitments, slashing trade, and withdraws military support. This creates much national support and quiet acquiesce, but reverberates mostly as China picks up the slack created and American trade, including commodity exports, suffer the most.

What this means for you…

Scenario Planning is part of a Strategic Planning process that involves describing various alternative futures. Developing scenarios enables management to create contingencies that reach beyond linear economic forecasts. This in turn enables leadership to stay ahead of trends and handle wild cards. Scenario planning also helps create common views of the future to improve decision making, as the team in effect “remembers the future” and stops all the hand wringing that wastes precious time.

Scenarios are not about predicting the future, but sketching various futures. The Trump is Trump scenario is just one of four potential stories developed as part of a robust strategic planning process. The topic of this particular scenario, Trump winning the presidential election was considered to be a “wild card” at the time. And here we are with its actual occurrence, illustrating how valuable our methods for long term planning really are. This particular client is fortunate to have worked with this methodology and is poised with specific initiatives to respond to the environment as it unfolds.