How to play China’s $2.4 trillion energy expansion plan

Thursday, 13 September 2018
Melbourne, Australia
By Bernd Struben

  • Why this time is different for ‘element U’
  • Mailbag

If you subscribe to more than one of our advisory services, or read our free e-letters, you’ll know our editors aren’t restricted to a ‘house view’.

This is to your advantage. It frees our editors to share their own well-researched ideas, whether those are bullish, bearish, or highly speculative punts. We leave it to you to decide who makes the best case to suit your own investment needs.

One area you will find broad agreement is that the free market almost always trumps one hampered by government meddling.

I say ‘almost’ always, because since I first moved to Australia in 2010, I’ve been mystified by the high energy prices in a nation brimming with resources.

Part of the reason is the higher costs involved with supplying energy to a relatively small population over an enormous area. But the main reason for soaring prices is because Aussies are competing directly with the international market for our own energy supplies.

That’s been a particular concern with the booming LNG industry. Last year consumers in Japan were reportedly paying less for their Aussie sourced gas than Australians were paying back home.

The government should never have let the situation get to this point. But since they did, this is a rare case where a little government intervention is the lesser of two evils.

I’m talking about the Australian Domestic Gas Security Mechanism (ADGSM).

The ADGSM came into force under Turnbull’s watch. It enables the government to restrict gas exports in times of domestic shortage.

Now energy companies — and some of my fellow editors — will say this government meddling is still detrimental. That it will inhibit future investment in gas exploration and see prices go up longer term.

I say that’s bollocks.

Global energy demand is booming. And plenty of companies will be happy to explore and develop more gas fields Down Under. Even if they do need to set aside some of their profits to supply Australians at a discount to international market prices.

Just look at the latest report from Wood Mackenzie. As The Australian reports:

Gas prices on Australia’s east coast are set to surge by up to 70 per cent over the next decade with the southern states forced to rely on LNG imports to get through peak demand in winter, consultancy Wood Mackenzie has warned….

“The Queensland LNG export projects have shattered the east coast’s ‘cheap gas forever’ mentality,” Wood Mackenzie’s director, gas and LNG research Nicholas Browne said in a report. “We believe Australia’s domestic gas price is now inextricably linked to the global LNG price.”

This comes at an awkward time for Scott Morrison, promising lower energy bills. But with these shortages in mind, Resources Minister Matt Canavan is keeping the government’s gas export trigger close at hand.

From The Sydney Morning Herald:

“A few weeks ago I heard directly from gas users about their real-world experiences of gas prices and availability. I put these concerns to gas producers and highlighted the critical importance of the gas industry itself taking action to boost production before I make any decision on controlling gas exports next year,” Mr Canavan said.

“The message from today is that the government will make sure that we have sufficient gas domestically to meet demand. We hopefully will not need to trigger export controls.”

Like it or not, export controls are a handy instrument in the government’s tool box.

The world is hungry for energy. And as we looked at yesterday, with millions of people in developing nations entering the middle class, that hunger is only going to grow. Not to mention the additional 3.6 billion people the UN expects to populate Earth by 2100.

All of that adds up to ballooning global demand for coal, gas, and one other crucial commodity Australia happens to have in abundance.

This commodity forms the basis of Greg Canavan’s new research report, ‘Element U’.

We’ll get back to that after the markets.

Markets

Overnight the Dow Jones Industrial Average closed up 27.86 points, or 0.11%.

The S&P 500 gained 1.03 points, or 0.04%.

In Europe, the Euro Stoxx 50 index finished up 14.94 points, or 0.45%. Meanwhile, the FTSE 100 rose 0.55%, and Germany’s DAX closed up 62.03 points, or 0.52%.

In Asian markets, Japan’s Nikkei 225 is up 194.20 points, or 0.86%. China’s CSI 300 is down 0.17%.

In Australia, the S&P/ASX 200 is down 42.22 points, or 0.68%.

On the commodities markets, West Texas Intermediate crude oil is US$70.05 per barrel. Brent crude is US$79.45 per barrel.

Oil spiked overnight, largely due to another big miss of analyst expectations on US crude inventories. This time to the downside. As The Australian Financial Review notes:

US West Texas Intermediate (WTI) crude futures rose $US1.12 to settle at $US70.37 a barrel, a one-week high.

US crude inventories fell by 5.3 million barrels in the last week, the US Energy Information Administration said on (Thursday (AEST). Analysts had expected a decrease of 805,000 barrels.’

I have family in the oil business in Texas and Colorado. And I know that nailing crude inventories isn’t as easy as putting a dipstick into an oil drum. But still. Your neighbourhood astrologist could probably make the next forecast and not be off by more than 558%.

Inventory miscalculations, fear over the looming Iranian sanctions, and Hurricane Florence aside, there’s plenty of oil in the ground. I still expect prices to fall 10­–15% by November.

Turning to gold, the yellow metal is trading for US$1,205.61 (AU$1,680.29) per troy ounce. Silver is US$14.25 (AU$19.86) per troy ounce.

One bitcoin is worth US$6,389.25. That’s up 2.0% since this time yesterday.

(For the latest investment insight on bitcoin and the other major cryptos, go here.)

The Aussie dollar is worth 71.75 US cents.

Why this time is different for ‘element U’

Yesterday I shared the following redacted excerpt from Greg Canavan’s advisory service, Crisis & Opportunity:

What was once a heavily oversupplied market is moving quickly toward undersupply. Major producers are cutting production or closing mines altogether. And as I’ve mentioned previously, London-listed                                is in the market stockpiling                 to await higher prices.

And higher prices are exactly what is likely to result from all this. When the big price moves might start is anyone’s guess. But history suggests that                 can indeed move very quickly once shortages start to become more widespread.’

Did you guess what the blacked-out commodity is? The title of Greg’s new report, ‘Element U’ may help.

If you guessed uranium, go to the front of the class. The London-listed company, by the way, is Yellow Cake Plc.

Now I know what you might be thinking. Investors betting on uranium and uranium stocks have largely been left nursing hefty losses over the past decade. Indeed, the uranium price has tracked steadily lower, as you can see in the 10-year chart below:



chart image

Source: Trading Economics
Click to enlarge


But if you narrow that down to the past year, you see something quite different happening, commencing in April.



chart image

Source: Trading Economics
Click to enlarge


On 31 August, Bloomberg reported on the price surge, writing:

Uranium is heading for its longest run of monthly gains since November 2014 as global supply tightens after mine closures and as producers and investors boost purchases in the spot market.’

Now Uranium has had a few false starts to bull runs that went nowhere before. But Greg is convinced this time is different.

And it all has to do with the Paris Climate Agreement.

Nations are spending trillions of dollars to move towards zero emission energy production. While LNG is cleaner than coal, it still produces CO2 and other waste. Meanwhile wind and solar aren’t even close to meeting the world’s rapidly growing energy demand.

While Australia is rich in uranium, to date we’ve stubbornly refused to consider nuclear power as a long-term solution. But many of the world’s largest nations don’t share that hesitation.

Take China, for example. Greg notes that Beijing has allocated $2.4 trillion to expand its nuclear power generation. That’s an increase in nuclear capacity of 6,600% over current levels.

China already has 36 operational nuclear reactors today, all generating emission free electricity.

They also still have plenty of coal fired plants, which burned through 769,000 tons of coal per day over the past two months. You can see how pollution-besieged China is eager for alternatives.

And let’s not forget the 1.3 billion Indians. Hungry for clean, reliable energy, India also has plans to massively expand its nuclear power capacity. According to Greg, by 2030, India plans to generate 63,000 megawatts of electricity from nuclear reactors. That’s up 11-fold from the 5,000 megawatts today. 

Russia, Japan and the US also have plans in place to expand their nuclear power capacities.

This all adds up to a very promising outlook for uranium.

In his new report, ‘Element U’ Greg explores the market in great detail. And he’s narrowed his focus onto three Australian listed companies he’s convinced are best set to capitalise on the coming bull run in uranium.

You can find all of that here.

Mailbag

We always enjoy your feedback — good or bad — and any other ideas you may have for us here at Port Phillip Insider.

Please send your correspondence to letters@portphillipinsider.com.au. In the interest of privacy, if we publish your letter, we’ll only use your first name.

Now before you sign off, here’s the latest on the international front from The Australian Tribune:

‘Putin Extends Extraordinary Olive Branch to Japan’

Dangerous ex-KGB leader and president of an enemy state? Or a man on a mission to finally normalise his nation’s relations with the rest of the world?

Russian President Vladimir Putin undoubtedly puts his nation’s interests first. But over the pasts months alone he’s met with US President Donald Trump and German President Angela Merkel to propose closer…

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd