08/05/2018 - 11:18

Bigger better no more

08/05/2018 - 11:18

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Opinion: The current banking royal commission and global shift to downsizing are raising questions as to whether any institution or business is too big to fail, or at least be broken up.

Bigger better no more
Nab was among those to have its financial planning practices exposed at the royal commission.

Big is certainly no longer beautiful in the eyes of bank customers or users of the world’s dominant social media platform, Facebook.

Scratch a bit deeper, however, and clear questions are being asked more broadly about whether a business needs to be big to succeed, particularly as other, more important, measures of success make a return, such as profit, return on funds, dividends to shareholders, and customer service.

The banks and Facebook are the obvious targets for criticism today, but there is an equally interesting process of self-analysis and shrinking under way in the mining and oil industries, driven largely by a discovery that size does not determine profit, and growth does not necessarily equal success.

BHP, for example, has already hacked off about 15 per cent of its assets to create a new company, South 32, and sometime in the next few weeks is expected to cut off another piece of itself by selling its underperforming US onshore oil and gas assets.

Rio Tinto is following a similar path, selling all of its coal assets in the name of exiting politically unpopular fossil fuels, with a side benefit being that a smaller company becomes easier to manage.

Politically, there is also a push to shift from big to small, with Britain’s exit from Europe a result of voters rejecting the idea of being part of a big family of diverse nations where the rules do not suit everyone.

What started this examination of the rejection of ‘big’ was an argument that sanctions on Russia for its poor international behaviour would not go as far as attacking one of that country’s most important businesses, Norilsk Nickel, in the same way sanctions have been applied to its big aluminium producer, Rusal.

Norilsk’s defenders believe that, if the Western world banned its nickel and palladium exports, there would be a global shortage of two important metals, which would be too high a price to pay.

In other words, Norilsk is too big and too important to be attacked, a variation on the perennial argument that Australia’s big four banks are too systemically important to be attacked.

In the case of Norilsk, a nickel and palladium shortage could follow sanctions. Like all such events, however, replacement supplies would quickly fill the gap as mothballed nickel mines were restarted and platinum production rose to replace palladium, because the two metals are interchangeable in most applications.

What happens to Russian aluminum or nickel producers might not seem to have much to do with Australian banks, or Facebook, but the common thread is the potential for them to be broken up or tamed by tougher government regulations.

In the case of Facebook, it would seem that a break-up would be easy to achieve, albeit at a high cost to shareholders. A first step would be to ban political advertising, a second being to ban the trade in personal data.

An end to political advertising would be a small price to pay. Banning the selling of personal data would kill the business as it currently exists and force a return to its original purpose as a place where users could communicate freely without being used. Advertising would continue to be carried but it wouldn’t target specific users, it would be just like conventional media.

For Australia’s banks, the current Financial Services Royal Commission is exposing practices and a workplace culture of excess most would find unacceptable.

The banks would also be relatively easy to tame, first by forcing them out of wealth management, a business in which they have so abysmally failed, and then the possible break-up of their consumer and business banking divisions, because customers in those areas have very different tolerances for risk or understanding of what they’re signing up for.

What glut?

SIX months ago, there was a common view in Australia’s oil and gas industry that the LNG boom was over and would never be repeated, after endless project completion delays and an estimated $50 billion in cost overruns.

The LNG boom isn’t back, but the industry is certainly looking a lot healthier today than last year.

Chevron, operator of the Gorgon LNG project, has been first cab off the rank with fresh investment in its gas gathering system. Woodside is following with talk of its long-delayed Browse project being dusted off just as planning starts for the development of the Scarborough gasfield.

Higher oil prices are the obvious cause of newfound optimism in the LNG sector, but there is a second force at work – strong demand for gas in Asia and concern about a potential shortage.

It wasn’t supposed to be like this, however, as the chief executive of Shell, Ben van Beurden, acknowledged last month when he said, “the LNG glut is conspicuously absent”.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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