Market sentiment seems to have shifted recently from fretting about monetary policy and Evergrande to worrying about the current energy crisis. Energy shortages and sharp price increases have been affecting Europe and parts of Asia such as India and China. This has been partly driven by pandemic-led supply chain issues combined with higher than anticipated demand as economies re-opened. However, the crisis also potentially highlights the misjudgment of premature underinvestment in fossil fuels as nations attempt a rapid transition to green energy. As winter approaches in the northern hemisphere, nations are scrambling to secure a stable supply of energy. This has led to a rally in commodities and has taken local energy stocks like Sasol and Exxaro along for the ride.
Sasol broke out of its consolidation range and rallied all the way up to 300 before pulling back after a minor retreat in the oil price. The oil price drop came after Russia indicated they would ramp up gas supply to support the industry. At the same time, the US mentioned that they were prepared to tap into their emergency oil reserves to ease price pressures. While these interventions have helped to stem some panic, they hardly seem adequate to completely resolve the crisis. Therefore, this pullback may be presenting an opportunity for re-entry into the stock.
While Exxaro’s daily chart doesn’t look very pretty, industry fundamentals support a bullish case for coal. China is currently scrambling for additional supplies after running down their inventories, partly because of trying to meet its emissions targets and partly from the unofficial ban they placed on Australian coal after Australia requested an investigation into the origin of Covid-19. India, where coal makes up roughly 70% of electricity generation, is also reportedly running dangerously low on coal reserves. It was reported last week that Indian power plants had an average of four days’ worth of coal left, and the power minister stated that this crisis could last up to six months. Many global coal producers are currently running at full capacity and unfortunately, ramping up coal production takes several months. This increases the probability of higher coal prices in the coming months.
A much better-looking chart in this space is that of Thungela Resources. It has been trending up nicely and has made a shallow retracement in the last few days, creating a possible entry opportunity.
In addition to its direct impact on commodities, of interest are the knock-on effects the energy crisis has on inflation, interest rates and ultimately currencies. With the growth momentum from reopening having seemingly peaked, the timing of the energy crisis has led to increased whispers of stagflation. Inflation expectations have certainly been creeping up and pushing up nominal rates. The US 10 year has had strong momentum in recent weeks and has now broken through the 1.60 level.
Emerging markets are obviously left quite vulnerable in this environment. Beyond the fact that higher US rates shift flows away from EMs, food & energy tends to have a higher weighting in EM CPI baskets. South Africa has been relatively fortunate in that we have not experienced similar re-opening inflationary pressures to those of other emerging markets who have been forced to hike rates early. In addition, earlier this year the sharp rise in prices of rhodium, palladium and iron ore helped support the Rand as other EMs were under pressure from a stronger dollar. But as the prices of these and other PGMs weakened, the Rand lost its strength and economists have expressed concern about where the currency will land as the commodity cycle turns going into next year.
Despite Chinese credit impulse weakening and a global tightening of monetary policy on the way, there does seem to be a potential silver lining for South Africa and the Rand. Even if the current energy crisis is somehow swiftly resolved and the demand for coal and oil eases, China and other developed nations have shown that their current green energy infrastructure is woefully unprepared to meet their energy demands. In rectifying this, it would mean significantly ramping up their demand for commodities like platinum and copper to boost their green energy infrastructure and capacity. This scenario would suggest there is further runway for the commodity cycle, and this would provide some support for our trade balance and currency.
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