SIMON BROWN: I’m chatting now with Izak Odendaal, Old Mutual Wealth investment strategist. Izak, I appreciate the early morning. In a note you put out last week you made the point up front that the surge in oil price that we’ve seen over the last year causes universal pain; no one escapes that. With oil back below $100/barrel, it is certainly helping many – we are going to see a nice petrol cut locally later this week. But Europe is still in a heap of pain in terms of energy.
IZAK ODENDAAL: Yes. Good morning, Simon. And it’s getting worse, because of course on Friday Russia announced that it would be shutting off the Nord Stream pipeline indefinitely, supposedly because there is a technical fault – but we all know what’s going on there. So Europe is extremely exposed to very high and also very volatile natural gas prices. And the difference between oil and gas, which I think is useful to understand, is that it’s easy to ship oil – you can kind of replace one barrel of oil with another – whereas natural gas is expensive to ship, it’s much cheaper to run these pipelines, and therefore there is no immediate alternative for European economies to the piped gas. They’re trying to import as much gas they can from the US and elsewhere, but have just not been able to do so sufficiently.
So you’ve seen the prices spike to unimaginable levels. You’ve seen electricity prices, wholesale electricity prices increase quite dramatically. That obviously puts the squeeze on consumers, it puts the squeeze on business. There are increased risks of rationing as we head into the winter months – as South Africans know load with shedding.
There are also a whole bunch of other problems, one of which is that a lot of European utilities hedged some of their exposures. They are now facing increased margin calls on these hedges, so now it’s becoming a financial issue as well. There was talk over the weekend of governments having to step in and bail out some of those utilities to prevent problems escalating into the banking sector if the collateral posted on those hedges can’t be can’t be raised.
SIMON BROWN: I hadn’t even thought of that. And of course [there’s] another challenge out there – we’ve been talking gas, to a fair degree the Russian invasion of Ukraine – but there’s [also] drought in Europe, and this extends across to China as well. The drought is a seasonal issue, but also perhaps a longer-term issue, much like the gas is in the sense of global warming and climate change.
IZAK ODENDAAL: Yes. It’s almost like everything’s gone wrong there, because of course of the big reliance on hydroelectricity in many of those countries. The low water levels can’t produce enough hydroelectricity. We’ve seen the same thing in China.
But also, interestingly, some of the nuclear plants have not been able to run at full capacity because they rely on rivers to cool them, especially sort of in the southern regions.
That’s also something I don’t think people really thought could happen – that you can’t run your nuclear plant at full capacity because it’s too hot.
I think the bottom line in all of this is that countries, governments but also investors need to start thinking a lot more about energy security, which is something we’ve taken for granted over the last couple of years. In fact in Germany in 2019, 2018, there were days when electricity prices turned negative; the sun shone so much and the wind blew so much that there was such an abundance of renewable energy that wholesale electricity prices actually turned negative. So in that kind of environment, you think, wow, gas is cheap and sunshine is free, and life’s good. No one thought or planned for this kind of environment where suddenly the gas is cut off. Nature doesn’t play along.
So [this] calls for a lot more investment in energy security, it calls for more redundancy.
And, again, it’s a theme coming out of Covid, where people are saying, well, it’s not all about efficiency any more, it’s now about resiliency – it’s about having spare capacity in case something goes wrong.
So it is a different environment that we appear to be moving into.
SIMON BROWN: Yes. I take your point. Just as the just-in-time supply chain was a victim of Covid, so is the plentiful energy. Looking at Europe – I’m thinking of Germany, for example, with its large industrial base which of course uses power … in the short term that hurts them because of the cost of the power, to your earlier point, but also potentially [presents] some opportunity because, of course, if they’re looking for that energy security there’s going to be some spending in that space, and that spending is somebody’s income.
IZAK ODENDAAL: Absolutely. So I think this is a long-term investment opportunity.
And I think the bigger the crisis, the more we need to think about how big the opportunity is. I think that’s always a good mindset to have as an investor.
There might be different kinds of opportunities, and maybe the obvious one is to say, well, you need to invest in electricity production. Maybe that’s not the best way to think about it. Maybe the best way to think about it is [about] one of those German industrial companies now being sold off heavily because Europe is facing a recession. But actually they are not as badly off as you might think at first glance.
This is an opportunity for people to start digging underneath the hood and looking for those companies that are going to be more resilient in this kind of environment, because these crises tend to not affect everybody equally.
But, absolutely, I do think we are moving into an environment where there’s going to be a lot more spending on energy security. That’s going to create opportunities. I think South Africa can be a beneficiary as well in the short term, because we are obviously a big coal producer – and that really has saved our bacon throughout this crisis.
But in the longer term also because of our hydrogen potential, [our] renewables, [our] platinum – and we might even be a big hydrocarbon producer.
We’ve seen big findings of oil and gas in Mozambique and Namibia, and there’s every reason to believe that South Africa might also have some of those resources.
I think the other point to make is that we as South Africans are a lot more used to this kind of energy crisis, [the] unstable energy environment. So I suppose we’ve also learned some lessons that they’re only now starting to learn in Europe.
SIMON BROWN: I take the point. We kind of sent it up north there. But in the crisis, there often is opportunity.
We’ll leave it there. Izak Odendaal, Old Mutual Wealth investment strategist, I appreciate the early morning.
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