Where to find the winners
In barrels or bags?
THE RAMPANT OIL price is the cause of much of the world’s current financial misery. It increases inflation, which in many countries results in interest rate increases and ultimately more pressure on consumers. But wherever there are losers, there are also winners. Resource stocks have long been the winners on the JSE, though there’s now some caution and we’ve seen resource counters crack briefly a few times in recent weeks.
However, within resources there’s a sector that could remain “winners” for some time to come – energy stocks. But for many investors the surprise might be exactly that energy resources are likely to be the sustainable winners.
Before getting there, though, some background from an insightful presentation by Michael Power, investment strategist at Investec Asset Management. Power recently looked at the potential of energy stocks and the oil price at the Momentum Wealth investment conference.
One effect of the high oil price on South African consumers (through high interest rates, but also the National Credit Act) is that they’re buying cars far less often. It’s crippling the retail motor industry. For example, Power shows that total motor vehicle sales in SA have fallen from close to 60 000 units late in 2007 to currently around 40 000 units.
Flip over to the other side of the world and you’ll see that, in 2006 (the latest confirmed figures Power has), China accounted for 72% of the world’s energy demand. “Oil consumption doubled in the decade to end-2006,” Power says. “And while China is a large oil producer, more than 50% of China’s oil demand is now imported.”
What’s driving China’s thirst for oil? Power presents two answers: the US one (what he calls “the CNBC answer”) and the Chinese answer.
The American answer goes like this: Vehicle sales in China touched 9m units last year (reverse to the start and compare that with the numbers for SA), estimated to rise to nearly 12m units this year and nearly 14m units in 2009. “This year, China will produce more cars than the US, with more than 80% sold domestically, and, of that, over 80% to first-time buyers,” Power says.
The sheer numbers are mind blowing and show one of the reasons Chinese cities have the pollution problems they do, even though those are effectively combated by the government that halves vehicle usage by alternatively banning cars ending with odd and even numbers from the roads.
But that’s what the US sees and that’s what China says. A total of 71% of its energy demand is used by industry (mainly for iron and steel production) and only 7% for transportation.
Despite that, it seems as if the oil compa- nies (in SA Sasol, which has done extremely well, and Oando, with operations in West Africa, mainly Nigeria) are the winners. Currently, they’re internationally, with BP last week growing second-quarter profits by 61%.
But when asked what will be the resource most likely to hold or increase its price and what the most promising energy shares are, Power bluntly replies “coal”. A closer look at China shows why he’s probably right: coal has fuelled far more of China’s GDP growth than oil.
According to Power’s breakdown of energy by fuel type, 60% of China’s growth is coming from coal and 20% from oil. By comparison, 28% of growth in the rest of the world comes from coal and 36% from oil.
Coal usage also causes huge pollution in China, but it looks as if it will remain the main driver of growth for a long time.
Add to this that China, also a large producer and still (just) a net exporter of coal, has seen a dramatic rise in imports. In 2000, according to Power’s information, China was exporting 55m t of coal and only importing 2m t. But coal imports have been on the rise ever since, and last year China exported 53m t of coal and imported 51m t.
Therefore any company mining and exporting coal to China seems to have as bright a future as the coal dust coming from Chinese industry will allow. If the mine is listed it looks like a winning energy stock for investors.
There are a number of listed coal companies on the JSE, some pure coal plays that only mine coal, but also the general mining companies that produce coal and other metals or minerals.
But investors must do their homework. Some SA mines have contracts to supply Eskom. That’s fine: Eskom will also need coal for a long time to come, but prices will probably not be as good.
The large coal exporters are the ones to look at, remembering to perhaps be a little cautious of relatively new listings on the AltX Finweek, 31 July).
What fuels the dragon. Michael Power