GIULIETTA TALEVI: Energy markets gone mad

Who would have thought that this year’s star resource stocks on the JSE would turn out to be its most socially shunned?

You almost feel sorry for those who sold their Thungela Resources shares when parent Anglo American unbundled its unwanted coal assets and listed the company in June.

After a rocky start – when many Anglo investors who received the stock as part of the unbundling simply dumped it – Thungela has rallied an almost unbelievable 371%, closing on Wednesday at R96.70 a share, after beginning its public life at just under R22.

Exxaro, the incumbent listed coal producer, has lagged the upstart (partly because of its exposure to iron ore, which has taken a latent dive), but it also now appears to be having a moment in the hazy sun, rising 2.3% on Wednesday, which takes its gains for the week to a cool 20%. Year to date, it has rallied almost 70%, against the wider resources index which is now only fractionally – 0.47% – in the green.

It’s not because of some pro-carbon, pro-pollution share traders either – though the moves seem perverse given the huge global push towards decarbonisation and a greener economy, which has really picked up in earnest this year.

So what exactly is going on out there?

Well, for a start, it’s precisely because of this push towards green energy and away from dirty coal that existing coal assets have become that much more valuable – simply because no real money is being spent on building new coal mines to bring on new production. The problem, though, is that large parts of the world still rely heavily on coal-fired power plants to generate their electricity – like China, India and, of course, SA.

But there are a host of other factors that have recently combined to form something of a cluster bomb in energy markets – be it coal, natural gas, or oil. 

These include China’s decision to ban imports of Australian coal following last year’s diplomatic row that began with Australia calling for an independent inquiry into the origins of the coronavirus.

Until this ban, China was importing almost 8Mt a month from Australia – 68% of its coal imports – to use in its power stations, which are responsible for about two-thirds of China’s power generation. 

Meanwhile, India is battling an “acute” shortage of coal. According to the FT, “as of October 3, India’s 135 thermal power plants had just four days’ worth of coal stocks, down from 13 days on August 1”.

Like China, “about 66% of India’s total electricity production comes from coal-fired thermal power plants, up from 62% in 2019. Generation of electricity from hydropower, gas and nuclear declined because of erratic monsoon rains, higher prices and maintenance at nuclear power plants.” 

Then, last week, writes the FT, Beijing ordered its state-owned energy companies to secure supplies for this winter “at all costs”.

“It’s really not about prices any more,” says Dmitry Popov, an analyst at commodities consultancy CRU. “It is trying to secure material for the coming weeks or months.”  

Now, add to this a massive increase in the price of natural gas – the commodity that northern Europe uses mostly to heat its homes – and you have the Europeans scrambling to switch to coal. Little surprise then that on Tuesday, the benchmark index for coal to northwest Europe scaled a record of $300 a ton – with prices doubling since the start of September. 

The natural gas market is in the grip of a speculative trading frenzy too, which has heaped extra pressure on some fundamental issues that have pushed prices up tenfold since the start of the year, including, writes Reuters, “low gas storage stocks, high EU carbon prices, low liquefied natural gas tanker deliveries due to higher demand from Asia, [fewer] gas supplies from Russia than usual, low renewable output and gas and nuclear maintenance outages”.  

Phew.

But betting that this will last would be foolish, say traders.

On Bloomberg on Wednesday night, Trading.Com analyst Carley Garner said there was “no good reason for natural gas to be up 10% one day then down the next”, calling the market “dysfunctional”.

The wild price swings, she argued, will probably force out all the speculation. 

Even Russian leader Vladimir Putin agrees. “This speculative craze doesn’t do us any good,” he said on Wednesday, after hinting that Russian state-owned natural gas supplier Gazprom might increase supplies to Europe.

“Let’s think through possibly increasing supply in the market, only we need to do it carefully. Settle with Gazprom and talk it over,” he said.

Writes the FT: “His remarks appeared aimed at staving off criticism from Europe that Russia is holding back supplies as it awaits approval for the controversial new Nord Stream 2 pipeline, which bypasses Ukraine to send gas to Germany. That project edged closer to going live on Wednesday after a judicial opinion in the EU.” 

Sage traders say the cure for high prices is high prices, a view echoed by Isidro Consunji, chair of Semirara Mining & Power, the Philippines’s largest coal producer, who expects prices to drop as more coal supply comes onto the market.  “At these levels, people will overproduce and then there will be too much supply, so prices will drop,” he said in an interview with Bloomberg this week. 

The big trick for traders who’ve ridden this energy bronco is when that might happen.

With politics involved as much as economics, it’s a brave person who makes that call.

Talevi is editor of the FM’s Money & Investing section