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Picture: REUTERS/DAVID GRAY
Picture: REUTERS/DAVID GRAY

I wrote in December that the energy transition will define this century, in ways that many in certain vested camps might not anticipate. A few events of global and local significance over the past weeks have served to emphasise the growing risk of being on the wrong side of the trade on this megatheme.

Globally, while all the talk is of important transitions, the facts tell a story of climate sins of commission. One of the most sobering statistics I have read in a long time was contained in the 2021 edition of the Renewables Global Status Report, which shows that in 2009 fossil fuels made up 80.3% of the global energy mix, and in 2019 it was 80.2%. Yes, you read that right, a 0.1 percentage point change in a decade. So much for environmental, social & governance (ESG) evangelism moving the needle.

The thing is, while renewables are growing much faster (5% a year) than fossil fuel use (1.7%), we’re using more energy every year so we’re still burning far more fossil fuels. The success of renewables isn’t even denting that or displacing it. It is merely in addition to it. That’s an inconvenient truth to swallow.

Every energy “transition” in history from the moment we threw the first log on the fire has seen humanity stack a new source of primary energy onto existing ones, which have themselves continued to grow. We have never managed to leave a primary energy source behind. The 1.5°C proposition is that we have to leave three (coal, oil and gas) behind completely over the next 30 years. This is bordering on delusional.

Return profile

And as increased scrutiny and pressure are brought to bear on carbon-intensive businesses, the unintended consequence is there for all to see in the year’s top-performing shares on the JSE. Dirty fossils such as Thungela (+119%), Hosken Consolidated Investments (+62% on a huge oil discovery), Sasol (+54%) and Exxaro (+54%) are leading the charge.

While having an ESG mandate certainly doesn’t preclude investors from investing in and shaping these businesses, you’d be naive to think investors are piling in for anything other than the return profile.

Thungela released exceptional results last week due to record high coal prices over the past 12 months of $300-$400 a tonne. As one analyst pointed out, “diversification was no doubt a theme that worried investors on the earnings call and I think for good reason ... if management diversify their commodity mix I am 100% out and I’m not going to be alone!”

Thungela is a cash-generating machine, with R8.7bn in cash by year end and an additional R3.6bn in the first quarter of 2022. With a market cap of R21bn, these are irresistible numbers.

Thungela CEO July Ndlovu said last week that the market is conflating two diversification thrusts. “First, we are a coal company, and we believe in the long-term fundamentals of coal. We intend to future-proof that coal core. We have a concentration of risk in being reliant on TFR [Transnet Freight Rail] and should we find attractive assets superior to our own projects we would consider buying an asset outside our current geography. That’s the first (geographic) diversification in the short to medium term.”

Inconvenient truth

Ndlovu added that he is “monitoring” the global shift away from coal, but now “diversifying into other commodities is complex and the valuations too rich, and [it is] a crowded space and therefore not something we would be pursing in the short to medium term”.

Then there is the other inconvenient truth: decarbonisation is far more fossil fuel-intensive than is widely understood, at least for the foreseeable future. An Investec paper authored by Campbell Parry, global resources analyst at Investec Wealth & Investment, reads that every $1-trillion of green capex will raise oil demand by 100,000 barrels a day. Producing an average-sized wind turbine requires 170 tonnes of coking coal.

Net zero will require 18 times the renewable energy capacity of 2020. Given the materials intensity of renewable energy generation, this seems implausible. Yet sustained high fossil fuel prices could hasten the adoption of renewables or even out-of-fashion nuclear. The cure for high prices is high prices, after all.

According to Wall Street’s “$10-trillion man”, Larry Fink (that’s more than the GDP of every country except the US and China), Russia’s invasion of Ukraine marks the beginning of the end of three decades of globalisation. The resultant onshoring will raise prices, but on the bright side more local manufacturing jobs could benefit blue-collar workers from the US to SA. Green energy adoption could accelerate as countries invest in renewables to limit reliance on imported fossil fuels.

Most of us can agree that climate catastrophe looms without deep systemic change. But we need to confront the reality that ESG is not the driver that’s being claimed. The energy transition will determine the winners and losers of the 21st century. Question is, where would you put your pension money now?

• Avery, a financial journalist and broadcaster, produces BDTV’s ‘Business Watch’. Contact him at badger@businesslive.co.za.

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