Who gets caught when the markets say ‘Gotcha!’ to fossil fuels?

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We have been led to believe that the planet is the first victim of our slowness to move to renewable energy.

It is the second.

The first group affected are those Australians’ super funds that have failed to get out of the way of the collapse in fossil fuel prices, and before that hit cuts the collective retirement income.  Those investors are now coming to terms with coal’s ‘gotcha’ moment.

ANZ last week made the lives of Australian coal companies (and their investors) that much more difficult with the announcement of much tighter lending criteria, a move which will have an impact on the proposed Adani mine, as well as existing operators including Wesfarmers (through its Curragh mine), Rio as well as pure plays like Whitehaven and New Hope.  The Bloomberg coal producers’ index (code: BICOATGC) shows a 40% drop in market capitalisation this year alone. Those investors who still hold these shares in the hope of a cyclical bounce, having been told to just wait out these “short-term” issues have woken to find themselves seriously misled. It’s structurally challenged, deeply.

It is just another marker along the way to something which now seems to have an air of inevitability about it: having already slowed to a trickle, new coal investment looks set to come to a complete stop in much of the developed world in the coming years.

ANZ, which is Australia’s largest lender to the fossil fuels industry, has said it will greenlight no new lending unless it is on the basis that the mine is best practice environmentally – CO2 emissions need to be below 800 kilograms per megawatt. Existing companies who want to extend their loans or mine life will have to meet these criteria.

It has already been a bad few weeks for fossil fuels. Chinese President Xi Jin Ping is increasingly committed to dealing with pollution, worried by the view of the broad sweep of the Chinese populace that this is a hot button issue for health. To this end, last week he committed China to an emissions trading scheme, having already mandated that from 2017 one in five government cars must be either electric or hybrid. There are now virtually no petrol engine motorbikes in Beijing or Shanghai currently.

This commitment, which was made jointly with US president Barack Obama, comes just a fortnight after a remarkable statement by 400 of the world’s biggest investors, representing US$2.6 trillion of funds under management, who said that they would no longer be investors in fossil fuels. Large as that number is, it is 50-fold increase on the number of divestment pledges just one year ago, when 181 institutions and 656 individuals representing more than $US50 billion of assets pulled the pin (the numbers are from Arabella Advisors, a well resourced London-based consultancy).

And while the Turnbull government’s credentials in this area are not yet certain, it is highly unlikely that there will be any more unhelpful comments about ugly wind farms from either he or his treasurer, or indeed anybody else in government (with one possible back bench exception). (Or any more PR videos about how great the little black rock is.) The renewables industry in Australia will be feeling a little more comfortable.

Indeed, people as diverse as the governor of the Bank of England, Mark Carney and John Hewson are flagging the likelihood that many of these fossil fuels assets will be stranded – unsaleable at anything like sunk cost, written-down book value or the like.

Of course, the Australian banks aren’t getting tougher on fossil fuels for altruistic reasons only. With $35b of loans at stake across a variety of projects (some of them in much cleaner burning gas) it is very much in the banks interest to keep their borrowers afloat to ensure repayment.

Holistically, the exit from coal should be viewed in the context of the fossil fuel industry generally. No less a luminary than the head of BHP, Andrew McKenzie, was quoted in the Australian Financial Review earlier this year suggesting that oil economics are changing, which is why the Saudis are ‘allowing’ the price to fall. “The policy shift is strategic not tactical. It is not so much a response to high-cost shale production as it is a recognition that oil’s longer demand horizons have changed.”

He goes on: “By defending prices the Saudis have merely encouraged the development of very high cost supply which makes a nice return. They make a bigger return, but ultimately what they do is (to) prevent huge amounts of low-cost Saudi oil ever being produced because they do worry about a time when the world doesn’t need oil. They’re saying that this idea we can just leave it in the ground and they will still want it in 300 years for our grandchildren’s grandchildren’s grandchildren, that’s a bit of a high-risk strategy, so we should get on with producing it.”

If you weren’t paying attention, you would think this was being said by the leader of the Australian greens. It most certainly isn’t.

Of course, McKenzie’s comments about the oil price come before any issues with the internal combustion engine, which it could be argued is having a ‘gotcha’ moment of its own with VW.

It now transpires that VW top brass pulled back from the more expensive Daimler diesel and developed their own 1.6l and 2.0l versions back in 2008, for a cost in the billions of Euros. Only trouble was, the finished product didn’t meet the European and US emission standards. VW’s option was to either junk the motor or lie about the test. The rest we know.

In the world of investing, there is a concept known as anchoring – basing a decision, in part, on the idea that what once happened can happen again. VW could fix the problem by re-tooling, spending the billions and rebuilding its diesel to once again achieve sales greatness (its market share was almost 14% globally). This idea is anchored in a fossil fuel-centric world view. If China wants cleaner air, and the world wants to burn fewer fossil fuels (rightly or wrongly) and the banks are now basing lending on environmental concerns as well, then the idea that we should just fix the problem using previous (but tweaked so they are better) solutions is just, well, wrong.

Once someone says gotcha, the game is over.






We invest in global change.

Google, one of the top ten listed US stocks, did not exist ten years ago.


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