One of the biggest challenges for forward thinking types – and we hope all our superannuation trustees are among them – is to identify the so-called mega-trends and calibrate their investment decisions accordingly.
Climate change, and the action that the world might one day take to mitigate its impacts, is one of them. Investigations into this theme that has led to the concept of the carbon bubble – the sudden impact of a major change in policies that leaves the value of untouched fossil fuels in the ground, and away from the stock market. For some companies, that could represent a significant portion of their listed value.
Various groups have had a guess at what this might mean for stock market valuations. The Carbon Tracker Initiative earlier this year warned of the potential of systemic risk from the exposure of investors to carbon-intensive listed firms. It noted that on London’s FTSE index alone, one third of the carbon exposure came from investments in the coal industry in Australia.
But exactly how much of that investment is really at risk, and what are the implications for investors. A new note to clients from Citi analyst Elaine Prior suggests a carbon bubble exists in Australia, but it might not be as big as some think at least in the listed sector, at least in the context of the overall market.
Prior estimates that around 3 per cent of the value of the ASX200 (currently worth just over one trillion dollars) relates to thermal coal for power generation. (Australian coal interests actually account for around 4 per cent of the total share market value, but thermal coal is the commodity at risk, Prior says, because coking coal (used in the making of steel) has no immediate technology substitute).
Prior says the value at risk might be between 1 and 2 per cent of the ASX200, and that will depend on the timing of any action. Although this translates into valuations of $10-$20 billion, it doest represent between one third and one half of the value ascribed to thermal coal investments.
As Prior noted in a 2009 report, which canvassed various scenarios for Woodside Petroleum and the now delisted Coal & Allied – around half of a company’s value relates to deposits that might be 10 years from exploitation. Around one third relates to assets that might be 15 years from exploitation.
However, she noted that every company, project and set of assumptions will yield different conclusions. “In ballpark terms, even if thermal coal use declines dramatically in 10-15 years time, only 1-2 per cent of ASX200 value appears potentially “at risk”. In reality, low cost, high quality producers with good export infrastructure may fare better during a transition away from coal.”
And, she noted, some companies may benefit from alternatives, including those who produce uranium or gas in a coal constrained world, or from construction renewable energy generation.
Companies exposed to thermal coal include BHP Billiton and Rio Tinto, Wesfarmers, coal miners such as Aquila, Bathurst Resources, Coalspur, and Whitehaven); companies involved in coal fired power generation such as AGL Energy, and a raft of mining services, engineering, explosives and transport companies such as Asciano, Ausdrill, Boart Longyear, Bradken, Downer EDI, Emeco, Incitec Pivot, Leighton Holdings, Macmahon, Monadelphous, NRW Holdings, Orica, QR National, Transfield Services, UGL, and WorleyParsons.
Of course, there are a number of companies with much wealth that are not listed, such as those within Gina Rinehart’s and Clive Palmer’s business empires. They might not take kindly to having one third or one half of the assumed worth of their thermal coal assets written off at the stroke of a pen at international climate talks.