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Big bang, big bucks? – Moneyweb

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FIFI PETERS: Tonight we are discussing the energy crisis – or the looming one – in Europe, and how it is impacting the continent’s Just Energy Transition into a lower-carbon environment.

Many countries in Europe right now are warning businesses and consumers to reduce their energy usage to avoid a situation in which governments have to implement rolling blackouts, kind of like what we have here in South Africa.

One of the reasons why energy is in limited or short supply over on that end is the Russia-Ukraine conflict and the impact that this has had on the supply of gas, as well as prices.

We have Tom Nelson, the head of thematic equity at Ninety One, for more on this story. Tom, thanks so much for your time.

You have been quoted in the media as saying that the Russia-Ukraine conflict, which has impacted Europe’s foundational supply of natural gas, has resulted in the rare collision of two historical events. Can you explain what these two events are?

TOM NELSON: Absolutely, Fifi, and it’s a pleasure to be with you today.

So what we are living through – and realistically we’re in the early stages of it – is effectively the third energy transition, the first transition having been a 19th Century phenomenon as we moved as a people, as a population of the world, from burning wood towards burning coal.

The second transition was predominantly a 20th Century phenomenon as we moved from burning coal towards burning oil and gas. Of course we didn’t exclude coal. We simply added oil and gas to the mix.

If we fast forward to today, we’re now seeing the introduction – and in some geographies the widespread adoption – of renewable energy: solar, wind and so on. So we think of this as the third transition, if you will.

Now, the other thing that you alluded to, the other seismic event, is this energy-supply shock, the effective removal of Russian energy into Europe, which is being most keenly felt by the removal of Russian natural gas, which European industry has relied on as a vital fuel source.

We’ve seen energy supply shocks before, most memorably, I suppose, in the 1970s, with the Arab-Israeli War and the boycott on Middle Eastern crude and the upward pressure that put on oil prices and inflation and so on.

But what we think is really, really interesting is the concept of these two giant events colliding: an energy transition, which is always going to be complicated, colliding with the supply shock and the effective removal of this Russian energy. That’s one of the reasons why we think here in Europe at the moment we’re seeing this chaotic pricing across natural gas, coal, electricity and so on.

FIFI PETERS: How long do you expect this to continue playing out, and do you expect it to have this dramatic effect on pricing?

TOM NELSON: I wish I knew the answer to that. We are all braced over here for a pretty complicated winter.

We are seeing governments intervene to put caps on domestic electricity and heating bills – having seen enormous moves higher, as I say, in terms of domestic bills. We wouldn’t be surprised to see more policy intervention of that nature.

There’s a tendency always in these situations, Fifi, to assume that this level of disruption and volatility and chaos will persist for a very long time. I would argue that we seem to have a way of finding solutions. We always tend to be a little bit more progressive and innovative in developing workarounds and ways forward than perhaps immediately expected.

So, sitting here in Europe, we’re braced for a complicated winter. A lot of people are beginning to look ahead to the winter of 2023 and how that will play out.

Of course, it goes without saying that it will be very weather-dependent.

The interesting thing that’s happening in terms of the industrial response is, in particular, the build-out of regasification terminals on the European mainland – in other words, terminals which will enable Germany and other countries to pull cargos of liquified natural gas into mainland Europe, and those cargos which in a normal operating environment would probably be finding their ways into the Asian and the Far Eastern markets.

FIFI PETERS: Is that something that can happen overnight, or is it something that may take some time? Also, what does this all signal for the energy transition of the continent as a whole into a cleaner and more renewable space over the long term?

TOM NELSON: Well, in the short term I think the uncomfortable truth is that, if you like, the dash for energy and the urgency around restoring normal provision and, where possible, normal pricing in energy – that, in the near term, is the priority.

So in a sense that has superseded the environmental impact of burning more gas and more coal, [which is] in the ascendancy, and we can expect that to remain the case for a little while longer.

I think what’s interesting – to your second question – about the energy transition is that we would expect, all else being equal, that while there will be, if you like, an environmental cost in the near term, actually it will accelerate the transition in the longer term.

The reason for that is that hydrocarbons have become very expensive again, and hydrocarbon-fuelled electricity has become very expensive again, which means that on a levelised cost of energy or levelised cost of electricity basis,

the renewable alternatives, renewable equivalents, are economically more attractive. So it’s a kind of short-term pain for what we expect to be a longer-term gain, which is an acceleration of that transition.

It’s going to be uncomfortable here for a while, but we must remember that, to come back to the point of the collision of the supply shock with the transition, if you look at the two previous transitions, they are very, very complicated.

You’ve got changing supply sources, changing demand trends, changing consumer preferences, changing regulatory environments.

These things can’t happen overnight. And that’s why we should expect at least a decade of pretty volatile pricing, we would argue, in terms of commodity price and hydrocarbon inputs.

FIFI PETERS: Okay. So that’s the macro environment. Ultimately, which companies are likely to do well in this environment in your view?

TOM NELSON: Well, the transition and the effects of the transition on a whole host of sectors is going to be incredibly interesting and exciting, we think, for active investors.

We’ve got businesses that will benefit directly from increased spending on renewable energy and decarbonisation.

So they will see higher growth and can expect to enjoy that, if you like, decarbonisation tailwind for decades to come.

Many of those are around areas like electrification and renewable energy, energy efficiency, and so on; environmental-type companies. They, we expect, will do very well.

There’s a very interesting group of companies and sub-sectors and sub-industries which sit in the middle, if I can call it that, by which I mean in areas and parts of the market which are emissions-intensive – some of them across resources, across power, across mobility, into agriculture.

And these are parts of the market which need to be carbonised, where a very high percentage of global emissions sit.

And interestingly, these are also parts of the market which we think could actually effectively make the conversion from being emissions-intensive, more structurally challenged industries, to actually being solution providers.

So an energy company that can move away from oil and gas towards low carbon, for example, or a steel company that can find a way of decarbonising its core processes, or agriculture companies that can make a success of green hydrogen, and the ammonia opportunities, and so on.

So there will be what we would call clear growth winners, and those have performed well in recent years.

But we also think some of the so-called ‘brown’ industries, which are asset-intensive, capital-intensive, emissions-intensive industries, need to change. They’ve attracted a low market rating and if they can make that change we think they’ll do well in the future.

FIFI PETERS: And as for the physical resources themselves, which ones in your view are said to benefit from the transition the most?

TOM NELSON: Well, I think, Fifi, there will be opportunities across the spectrum. I think a lot has been written about the metals opportunity, and metals and minerals that will have key roles to play in decarbonising technologies. [We’re] thinking there about copper and its role in electrification, we’re thinking about nickel, about zinc, about cobalt, about lithium.

There have been some fantastically interesting studies on the metals intensity of a whole load of different renewable energy and environmental technologies. So that’s one that’s been written about a lot.

I think the evolution, if you like, of traditional big energy companies will be very interesting to watch.

These are businesses that have historically been oil and gas producers, with a refining business on the side. We expect them to do more chemicals, and we’re watching very carefully to see opportunities in things like sustainable aviation fuel.

We are looking at the opportunities presenting themselves in the hydrogen economy, carbon capture. Some of these technologies are very, very nascent, largely unproven.

But businesses that can crack the code and can be the leaders in these essential technologies, we think will do very well.

But of course, the market is not going to pay up for that until it sees a chance for commercial success and scalability.

FIFI PETERS: All right. So, bottom line, there is some light in the long term, despite the potential darkness that could hit the European economy in the short term. Tom, we’ll leave it there. Tom Nelson is the head of thematic equity at Ninety One.

Brought to you by Ninety One. 

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