Commodities and Global Markets Podcast Series
Recorded on 25 February 2020.
Voiceover: Welcome to the Macquarie Podcast Series featuring Commodities and Global Markets.
Arun: Hello, everyone. My name is Arun Assumall. I am the Head of the Commodity Investor Products and Quantitative Investment Strategies business at Macquarie.
I am really excited to welcome you to the first episode in our new podcast series. Today, I am delighted to welcome, Nick O’Kane, Head of the CGM Division. Nick is also a member of Macquarie’s Executive Committee and at the heart of what is going on in the business. Nick, thank you for joining us today. Can you start by telling us a bit about yourself and the progression of your career so far?
Nick: Thanks, Arun. Firstly, delighted to be here and have the opportunity to have a bit of a chat. I have been with Macquarie 25 years. I joined in 1995, actually March 27. So, in just a couple of days it’s my anniversary. I was appointed Head of the Energy Markets Division in 2007 when I was based in the US and we have expanded significantly through that time both through acquisition and organic growth to be a pretty significant participant in the commodities markets globally. In 2017, we formed the Commodity Markets and Finance division, which brought all of our commodity activities together and I’ve led that division since that time. And most recently, I’ve been appointed Head of Commodities and Global Markets.
Arun: Commodities and Global Markets is a large and successful business. What is it that makes it tick?
Nick: I think when we reflect on the Commodities and Global Markets business at Macquarie, everything that we do is centred around client activity. So, all aspects of foreign exchange, fixed income, commodities, technology, media and telecoms, whichever market that we’re covering, the customer is at the forefront of everything that we do. So, we are covering more than 25 markets in 50 countries these days.
We have over 200 products that have evolved in more than four decades of providing service to our clients. We provide access to markets, financing, financial hedging, research, market analysis, and finally, logistical services, which is also known as physical execution. We have over 5,000 unique client relationships now. Each of those clients have some kind of exposure to either a financial market or a commodity market, or they have some kind of requirement for capital to help them manage or develop their business. So, each year, our client base continues to grow and 85% of the revenue that we generate generally comes from existing relationships. And that demonstrates the real core strength of our client franchise, because our clients are coming back to us. So, I think that’s demonstrating for us that we’re providing a service to them that is of value because they are coming back and they’re dealing with us again.
When we talk to our clients, we often ask them for feedback because they are the centre of everything we do. So, we want to know what they are thinking about us and they often tell us that they appreciate the bespoke offering of the products that we provide. They appreciate that they are specifically tailored to their needs. They respect the strong understanding of the markets that we are operating in and reflecting the deep expertise of our staff, and I think that results in a shared partnership experience with our clients.
Arun: Well, 5,000 unique customer relationships and 85% of client revenue coming from existing relationships is really some achievement. As you mentioned, you have now been at Macquarie for almost 25 years. How you seen the business change in this period?
Nick: Well, we have changed a lot in some ways in terms of the growth and evolution of the businesses that we are involved in, but in some ways we haven’t really changed at all. In terms of our core values around integrity, accountability and opportunity, those things haven’t changed over the course of our involvement in the markets.
As you know, Macquarie has been profitable every year throughout a lot of different cycles, reflecting a real strength in risk management and also the real strength of the underlying client business. So, we’ve been very consistent from that perspective. And so CGM, as part of Macquarie, has been no different in terms of the way that it has evolved, where we’ve evolved into different geographies, where our customers are located and where their risks need to be managed. So, to give you a bit of an example, recently we expanded into gas trading in Mexico City. The domestic gas industry had recently deregulated there so it was an obvious opportunity for us to expand our business. It’s adjacent to the North American gas market, where we have considerable expertise, and we were able to export technology that was developed in those markets to our customers in Mexico. What’s interesting about this example is that that opportunity was 12 years in the making. So, we waited for the right time to enter that market, when our customers demonstrated to us that the need was there. We wanted to see that the regulatory environment was appropriate and when it was, and when customers did demonstrate that need and we were comfortable from a regulatory perspective, we were able to move really quickly. Perhaps, one of the first in the industry to do so. So, we were able to make inroads into that market relatively quickly. And I think what that demonstrates is an ability to be patient, but also to be agile and nimble and to move when the opportunity is there.
We have over 2,500 staff across the globe now in different locations and they are tailored to solving our customers’ risk management, capital and logistical challenges. Some of those staff have really special skills over a broad range of products and a broad range of geographies. So, for instance, we have logistical experts who help us move commodities from where they are produced to where they are consumed in the most efficient way possible. We have meteorologists on staff who forecast weather patterns that impact commodity prices on a daily basis. And we have data scientists and quant PhDs who help us interpret that wealth of data that we are accumulating again on a daily basis. And we have to make sense of that data and help work out what that data means in terms of again, impact on prices globally and what does this mean for our customers from a risk management perspective.
Arun: Nick, if we can now turn towards the markets and the macro environment, obviously there was significant volatility last year ranging from the US / China trade dispute to the tensions between Iran and the US weighing heavily on the markets. And obviously this year we have seen the coronavirus have very big impacts on the markets so far. How do you navigate this volatility?
Nick: Yeah, you’re rigYeah, you’re right, Arun. It’s been a really interesting time in global commodity and financial markets and generally when there is an interesting time we find out our clients are quite active and our products help our clients solve the risk management problems that they are facing. When we look at our business, one of the things which is really interesting is that 65% of our portfolio represents recurring income from either annuity business lines and these are like our lending business, our leasing business, or our financing businesses or they come from repeat revenue opportunities that come from our stable client base.
So, from a business perspective, we feel like there is a lot of stability in the earnings that come from activity from those types of business lines. And when we analyse our commodities businesses a little bit more closely we find that between 60 and 70% of the business activities either have very low or no correlation between each other. So, when volatility might drop in one sector, we’ll probably see a bit of a reduction in client activity in that sector, but more often than not that will be offset by an increased volatility in another business line.
So, we saw something like that happen in the last financial year where global oil markets actually were less volatile than we would normally expect them to be and our customer activity as a result came off a little bit as well. In our portfolio, we saw a really significant increase in volatility and then customer activity in our North American, European gas and power businesses. That resulted in an increase in activity from our customer base, offsetting that reduction in the oil markets. So, from our perspective, that gives us the ability to help manage and navigate our way through what can be relatively tricky markets.
So, again there’s a lot of diversity across our business lines. Roughly 60% of the revenues generated from commodities, 25% is from our financial markets activity and about 15% comes from our asset finance activities.
Arun: So, the business is doing well. We’re navigating the volatility, as well as branching into new areas. So, what actually keeps you awake at night, Nick?
Nick: Well, invariably whenever we’re having this type of discussion with colleagues or customers or indeed investors in Macquarie, it always comes down to some discussion about risk. So whether that’s something like geo-political tension in the Middle East, the impact of a coronavirus and the subsequent impact on something like global demand or the demand for oil or the demand for something like jet fuel, which is significantly impacted by something of this nature. We’re always finding that risk is at the forefront of every single thing that we do. So, risk management is a factor in every decision that we make.
One of the things that’s quite unique about Macquarie is that we have accumulated this experience in managing risk in over half a century. So, there’s really strong focus on risk culture across CGM. Every individual within our business is held accountable for all aspects of risk management, whether that be market risk, credit risk, operational risk, non-financial and conduct risk. If you were to ask any of our colleagues, no matter which office they might be in – and they might be in the Mexico City office or they may be in the Houston office, they could be in London or they could be in Singapore – each one of them will tell you that they feel accountable on a daily basis for managing those risks and I think that is something that is unique about Macquarie, but one of the things that helps us manage risk in the way that we do.
There is a very robust second line of review that comes from the centre. In our case, we call that the Risk Management Group, who are there to question what we’re doing and challenge the business, and one of the aspects that hasn’t changed in the way we’ve thought about risks over those 50 years is that we’re always focusing on what that worst-case outcome could be, however remote or unlikely it is. We want to understand what’s the worst thing that can happen and what would the impact be, and if that thing does happen, do we have enough capital to continue on in our business.
Arun: Yeah, I can certainly testify to that risk culture you talk about, Nick, as well as the very impressive Risk Management Group and the way they think about risk in those scenarios. If we change the subject to the energy markets, which is obviously an area of significant interest, and in particular renewable energy, what are we doing in this space?
Nick: You know, that’s a great question. Energy is a really big part of what Macquarie provides to the market, but more specifically what CGM provides. We’ve got really significant businesses across the energy markets globally and we don’t expect that to change. All primary energy sources are expected to grow, but the fastest growing energy source will be renewable energy.
Fossil fuels will continue to be part of the solution and are necessary to help us transition to a lower carbon environment, and one of the fossil fuels that we think will be most relevant is natural gas and that will continue to be the world’s fastest growing fossil fuel. But by 2050, renewables will account for roughly half of the total world electricity generation or more, by then. So, it’s a really significant part of the future and Macquarie is at the forefront of developing a lot of the new technology there and making sure that production will be in place to satisfy those demands. So, it’s an exciting market, it’s a growing market. We see significant opportunity to help our customers transition to that low-carbon economy.
One of the things that’s very interesting about us is that we have a deep understanding of the global energy footprint across the oil business, across the gas business, across the electricity business, across the renewables businesses, but also across things like the emissions certificate businesses. So, we’ve learnt how to move energy both domestically and internationally in efficient ways and how to help service our customers as they try and navigate those challenges.
So, we think that uniquely positions us to capitalise on those opportunities that relate to the energy transition and that might include participation in the LNG markets – which is liquefied natural gas. That is the market that takes gas that is produced in a certain country, it liquefies it, so it can be stored on a ship, and then moves it to another country where the demand is greater for that gas. We think that LNG markets are going to triple over the next 10 years. So, we think that’s a really important market for us and we think that’s a really important service that our customers are going to need and rely on as the market is transitioned to a lower carbon economy.
There are other things though - there is the emergence of hydrogen as a new energy class and we expect to participate in that, and finally the production of renewable energies, as we touched on earlier, is something where we collaborate really closely with other areas in Macquarie, including the Green Investment Group. So, we see this as perhaps the most exciting part of the energy markets as they currently stand.
Arun: There has been a fundamental shift in the energy landscape in North America. You know that market as well as anyone, having led that business. How well-positioned is CGM to take advantage of this huge opportunity?
Nick: I think the North American Gas and Power business has been a real success story for Macquarie and has led the way in some of the commodity businesses really growing in scale, particularly over the last 15 years or so. It has been a combination of strategic acquisitions and organic growth, as our customers have asked us to provide more products for them.
What we have witnessed there is massive shifts in particularly the natural gas market over the last 10 years, with the revolution and evolution of shale production. So, those evolutions and changes have resulted in different demands on the business. So, what we’re seeing is the revolution of shale gas that has resulted in really significant increases in production across North America. So we’ve seen production grow to circa 90BCF of gas a day, which is up from the mid-50s not that long ago, and that has resulted in a real fundamental change across the North American energy landscape, because not only have we had a really significant increase in production, what we’ve seen is changes in where that gas is produced and where that’s consumed. So, we’ve seen new production areas build up and we’ve seen new consumption areas build up as a result of lower cost gas. So that’s manifested itself in new manufacturing opportunities, but also in things like increased exports to places like Mexico and the evolution of the LNG market. And what that has meant is that there’s been a greater need across the North American market to understand how to move those molecules from where they are produced to where they are consumed, and as we’ve talked about earlier, Arun, that’s one of the things that the Macquarie CGM business does very well.
What we are designed to do and the way we’ve designed our business is to be able to solve the problems that are created by the changing energy landscape, so, changing where production is happening, changing where consumption is happening. People need to work out how do you move energy on existing infrastructure, how do you do it efficiently, how do you it reliably and that’s what the CGM business does.
Arun: Wow, that’s a really impressive story so far. Turning to the future, can you give us an insight into some of the potential opportunities we’re looking at?
Nick: Yeah, I just touched on this evolution and we talked about LNG, the increase in demand in LNG and how well-positioned our business is to participate in that, given the expertise in the North American markets, the expertise in the European markets and of course our significant position that we have in the Asian markets, but that’s not all. I think some of the opportunities that we’ll look at over the coming months and coming years is to continue to invest in disruptive technologies such as blockchain, as they will create a lot of opportunity for disruption and change in our marketplace.
We expect to participate in the replacement of the ageing energy infrastructure. In other things, we’ll be looking to expand into new geographies, including growing our fixed income and currencies business in Asia, in the Americas and Europe. We’ll look to grow our SAF business deeper into Europe, where we’ll look to expand our smart meter portfolio, and of course we’ll increase our solar businesses as that part of the market continues to expand. And in each and every one of these opportunities, what we’re really looking to do is to capture a new class of customer as this expansion takes place and as our customers transition to a low-carbon economy.
Arun: On that note, Nick, there’s still a significant focus on global warming and companies moving to a low-carbon economy. What are we doing in this space?
Nick: I think that’s a really good question, Arun, I think as a corporate participant in industry, we have a responsibility to the community in terms of the way that we’re conducting ourselves and also to be part of the solution. And I think our credentials in this space are very, very strong. In 2017, Macquarie acquired the Green Investment Group, creating one of Europe’s largest teams of dedicated green infrastructure investors. And we have a track record, expertise and capability that make us a global leader in green investment and we’re dedicated to supporting growth in the global green economy.
Let me give you a couple of examples of what we’re working on in CGM. Right now, there’s a really interesting opportunity we’re pursuing alongside an independent crude producer. What we’re doing there is, we’re working on a carbon capture programme. Ultimately, we’ll take that carbon and we’ll use it in an enhanced oil recovery project. The carbon will get permanently sequestered into the ground once that barrel of oil is produced, and it results in either a carbon neutral or carbon negative production of a barrel of oil. So, as you can appreciate that’s a pretty exciting concept and one in which we’re proud to be associated with and working very, very highly on that.
We’re also experiencing a high growth in demand from our clients on voluntary carbon offset schemes. So, we’re working with those clients to build out offset schemes with other commodities, or even creating new asset classes. So, what does that actually mean?
In one case, we’re talking to a customer about a jet fuel supply contract that’s bundled with an offset so we can provide a one-stop solution for that customer. We’re also talking to customers about the development of carbon-neutral aircraft, where the total expected lifetime emissions of that plane are calculated and offset at delivery. So, the cost can be built into the capex of the aircraft, we can debt finance that and then we can amortise that over the working life of that aircraft. And then we’re also talking to a major rideshare company about including an offset button in their app. That’s going to allow the customer to elect to offset their carbon footprint at the time of purchasing their ride. But what’s the common thing across all of these opportunities? Basically, it’s that we’re partnering with our clients as they transition to the low-carbon economy.
Arun: Those sound like really fantastic initiatives. How would you sum up the next 12 months for CGM?
Nick: Yes, I agree, it’s a super exciting time for CGM in general. 65% of our earnings are derived from our current business lines. We’re well diversified across customers, revenues and geographies. And the majority of our business lines have very low or no correlation with each other. So we see really significant upside and potential to grow into adjacent spaces, so ones in which we’re already operating in and our customers are asking us to help them, so transitioning into a low-carbon economy. And we’re looking forward to partnering with our clients as they do make that transition.
Arun: As you say, Nick, it’s a really exciting time from a business perspective: from renewables and meteorologists to carbon-neutral aircraft and smart meters. If we go all the way back 25 years ago to the beginning of your career, what advice do you wish someone had given to you?
Nick: I can’t answer what advice I wish someone would give to me, but I can answer with some advice that someone did give to me 25 years ago when I started. And I’ve often thought about this throughout my career. And basically, it’s around taking advantage of the opportunities that are given to you.
One of the really fantastic things about Macquarie is you get the opportunity to do a lot of different things. And that resonated with me when someone shared that piece of advice with me. In fact, that’s why I joined Macquarie, because I was working at another organisation and I was intrigued by the entrepreneurial approach of Macquarie 25 years ago, which I still think exists today. So, I’m thankful for that piece of advice, which was given to me, and I’ve followed it a lot throughout my career.
Arun: That sounds like great advice, Nick. Final question from me: what are your interests and passions outside of Macquarie when you do have time to relax?
Nick: I have a four-year-old son, so I don’t have any time to relax. [Laughter]. However, we do things like going to the beach. I enjoy snow skiing. I’m an avid fan of AFL football, even though I haven’t lived in Australia for a very long time, so I tend to do all of those things. And now, I do those with my four-year-old son and my wife.
Arun: Nick, thank you for that insight into your career and CGM. It truly was fascinating. For those of you listening today, I’d like to thank you for joining today’s podcast. I hope it has provided some inspiration as you consider your own careers. We look forward to welcoming you to the next episode in the podcast series, next month. Thanks for listening, and we hope you’ll join us on our next podcast.
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