Where to find the win­ners

In bar­rels or bags?

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS shaunh@fin­week.co.za

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

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