ESG Focus: The Little Big Things – 15-05-2024

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Little Big Things  – 07-05-2024

The stellar rate of decarbonisation has yielded astonishing step-changes in recent months across the green transition board as several key markets hit parity with fossil fuels; expensive retrofits are making properties obsolete, says Morgan Stanley; and Jarden picks out social winners on the data compliance and psychosocial safety fronts.

-Expensive retrofits are making properties obsolete
-Gas-fired DRI/EAF steel is now at parity with coal blast furnaces
-Forecast gas glut could put DRI/EAF well ahead
-Green hydrogen prices to hit parity with grey hydrogen in 2026
-EV charging times approach parity with petrol re-fuelling
-Battery recycling barrelling down
-Beyond the short-term quagmire, analysts like Sims' long-term prospects
-Data compliance costs to rise but Jarden sees plenty of opportunity

Compiled by Sarah Mills

Morgan Stanley Issues Property Warning

Morgan Stanley posits higher interest rates are boosting capital risks in commercial property, a trend being amplified by sustainability challenges.

Given buildings account for 30% of global energy consumption, the analyst observes the industry will be unable to avoid expenditure on retrofits if the world is to meet net-zero targets.

Morgan Stanley predicts EUR2.8trn investment in energy renovation will be required by 2030, and EUR5trn long term.

The upshot is many property assets could become obsolete as the costs to improve energy performance outweigh the renovation benefits, says Morgan Stanley. 

The analyst believes listed landlords have higher quality assets given most have set targets to reduce carbon dioxide emissions in their portfolios. 

But it’s not all bad news. On the flipside, the analyst reveals the winners to be the banks and building materials sectors.

Morgan Stanley estimates EUR400bn to EUR800bn will be required in Europe and Britain over the next five to 10 years, and one assumes similar investments will be necessary in other nations.

The analyst says the expenditure offers an opportunity for banks, many of which have also committed to substantially cut emissions intensity in their real-estate portfolios by 2030. 

This being the case, 2024 might be a good year to get cracking on solar given a forecast solar panel glut.

Among offshore companies to benefit from these trends, Saint Gobain is the broker's top pick.

DRI and EAF Steel Fall To Parity With Blast Furnaces

UBS observes the cost of gas-fired and hydrogen-fired DRI/EAF steel is falling relative to blast furnaces.

The analyst notes in 2022 the forecast cost of H2EAF production was more than double that of blast-furnace steel based on Platts’ hydrogen prices after gas prices skyrocketed in response to the Ukraine conflict. 

But prices have normalised, and UBS calculates gas-fired DRI now appears a touch cheaper than blast-furnace steel, and blue-hydrogen fired DRI is just a touch more expensive.

When it comes to green hydrogen, UBS says on current assumptions, green steel investments are starting to earn their cost of capital (including government subsidies).

UBS says green hydrogen costs are still US$60-US$80 a tonne higher than blast-furnace coal, but after factoring in the removal of free allocation of CO2 by 2034, the tables turn, so investors will be keeping a keen eye on CO2 allocation progress. 

The broker says its calculations do not include lower cost green power and possibly gas, nor green premiums.

Forecast LNG Could Cut Gas-Fuelled DRI Further

IEEFA is forecasting a flood of LNG supply amid sluggish demand.

The analyst expects global LNG supply capacity to increase 40% by 2028 as Europe, Japan and South Korea slash imports (together they constitute half of the world’s gas imports) through to 2030.

Lacklustre demand-growth combined with a huge wave of new export capacity will push global liquefied natural gas (LNG) markets into oversupply within two years, says IEEFA, noting demand-growth from emerging economies is not guaranteed even in an oversupplied market. 

Other analysts observe a LNG glut in Asia and estimate a global -30% downside risk to 2025-2026 futures.

Green Hydrogen Prices At Parity With Grey Hydrogen

UBS also expects in Europe the levelised costs of green hydrogen will hit parity with grey hydrogen by 2026, noting it is now cheaper than both grey and blue hydrogen in the US after tax credits.

The analyst shifts to a bullish position on green hydrogen and hydrogen technology generally as result.

Fortescue ((FMG)) opened Australia’s first commercial-scale hydrogen electrolyser manufacturing facility in Gladstone last month.

CCUS Prospects Poor, Says IEA

Despite Cop28 approving toxic, exorbitant nuclear energy and ineffective carbon capture utilisation and storage, the market may have its own thoughts now green costs have fallen so sharply.

IEEFA’s Simon Nicholas puts the kybosh on the use of CCUS in particular, observing environmental risks (fracking) from geological storage and potential leaks; the low rate of capture and the fact that costs haven’t fallen in decades (in comparison to gas-fired DRI costs which are now on par with blast furnaces); low availability of storage; and permitting.

The analyst estimates the percentage of global emissions captured by the broader CCUS by 2035 from all sectors to be a tiny 1.1%; plus that steel CCUS will constitute a minuscule 1% to 2% of that.

The world’s only commercial CCUS plant – Al Reyadah’s gas-fired Direct Reduce Iron plant in the UAE – captures just 19% to 26% of the plant’s emissions and the captured product is used for enhanced oil recovery, which Nicholas observes is not very prospective. 

The plant is now moving to green hydrogen starting this year and there are no plans to use CCUS for coal-based plants anywhere in the world, says the analyst.

UBS notes the International Energy Agency appears to have shifted its long-term view on CCUS generally, the agency observing slow take-up and poor result and dubbing forecast policy settings as “inconceivable”.

CCUS is an “essential technology for achieving net-zero emissions in certain sectors (such as building materials) and circumstances, but it is not a way to retain the status quo,” says the IEA.

Morgan Stanley remains a CCUS fan.

Analysts Like Sims Long-Term Prospects

Jarden says Sims ((SGM)) offers “tremendous” exposure to the circular economy as the transition to EAFs accelerates, but doesn’t see this kicking in any time soon.

The analyst expects the recycler, which turned in a poor first half, is likely to see more of the same this half if the poor performance of north American competitors is anything to go by. (North America represents 50% of group revenues).

On the upside, Jarden observes strong pricing across non-ferrous markets. The broker is hoping the new C-suite can realise cost savings, provide greater earnings transparencies and develop more predictable earnings streams. 

Macquarie holds an Outperform rating, believing that even should the company’s recovery be extended, now is a good entry point.

UBS holds a Buy rating, as does Citi.

The forecast fall in gas prices could also prove a boon for electric arc furnace steelmaking.

EV Charging Times Plummeting

Perhaps the most astonishing progress of the transition in the past few months has been in the area of EV charging.

Huawei Digital Power has rolled out ultrafast EV chargers in China, with plans to install 100,000 units, competing with Tesla.

Nikkei Asia notes a charging station in Huawei’s home city of Shenzhen is advertising a 1km range for every second of charging (bringing it to parity with gas-fuelling times) at 600kW, says the journal. 

This equates to 8 minutes on an 80kW battery with 600km range (depending on weather and remaining battery capacity) and compares with Tesla’s 250kW battery, which would take 19 minutes.

Meanwhile, Bloomberg observes China’s energy giant Contemporary Amperex Technology Co (CATL) has upgraded its battery capacity for roughly the second time in just over six months – this time by 50%. Its Shenxing battery pack can power a car up to 600km from just a 10-minute charge. A lithium-iron phosphate battery is capable of 1000km on a full charge.

Tesla’s CEO Elon Musk has pointed out the batteries have a long runway of innovation.

Morgan Stanley has upgraded CATL to Overweight (the shares are down -50% off 2021 highs), believing the worst of price competition has passed, the impact from IRA subsidies has been priced in; the company is improving capital expenditure efficiency as new production lines scale; and the company is experiencing improved energy storage economics as China ramps renewable and storage capacity.

Bloomberg also spied a game-changing upgrade to EV chargers at the Beijing auto show, where an exhibitor said its chargers had been successfully tested at levels as high as 800kw, enough to transmit all the power a Tesla Model 3 can hold in less than five minutes!

Combine fast chargers with fast-charging batteries and EVs is starting to look amped. EV prices are the next frontier and EV-makers around the world are already slashing prices and planning the launch of a range of budget cars.

Battery Recycling Appears Ready To Rock

The final frontier for EVs (as well as grids) will be battery recycling, an innovation that will not only slay the naysayers who point out the hefty environmental burden of battery production, but have huge impacts on demand for critical minerals and metals and the geopolitics of their production. 

That transition to recycling appears to be rapidly approaching.

A recent report from Stanford shows Redwood Materials’ (founded by Tesla co-founder JB Straubel) recycling process produces up to -80% fewer emissions than carbon-dioxide-based supply chains, while bringing the breakeven mileage point down to 21,000km from 41,000km, depending on the electricity source (green power is rapidly getting cheaper). 

The Stanford research showed Redwood’s recycled batteries used -79% less energy and resulted in -55% fewer carbon emissions than traditional refining, while providing the added benefit of localising supply chains. 

Bloomberg observes once the factory can produce one battery per minute (the run-rate for a vehicle in a Tesla factory), it will be able to rival traditional mining operations.

The journal notes battery design currently directs battery recycling methods, but expects this to reverse within the not-too-distant future, resulting in a greater simplicity in EV battery design.

Bloomberg NEF observes China controls 70% of lithium refining capacity and 95% of other critical minerals, suggesting it would have the most to lose in that transition.

Mandatory Reporting Postponed

The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill introduced in late March has postponed the start date for large companies reporting on mandatory climate disclosures to January 2025 from July 2024, giving Australia’s biggest companies time to get their reporting act into gear.

Big Compliance Costs Looming On Data

Jarden says proposed changes to privacy laws and rising fines will translate into huge compliances costs for big companies, which will be forced to redesign internal procedures for information management.

The analyst also spies an AI opportunity.

Jarden believes the health ecosystem can better utilise its data for preventative health and believes Medibank Private ((MPL)), nib Holdings ((NHF)), Wesfarmers ((WES)), and Worley ((WOR)) are best positioned to benefit.

Jarden expects Capitol Health ((CAJ)), Healius ((HLS)), Integral Diagnostics ((IDX)), Ramsay Health Care ((RHC)), and Sonic Healthcare ((SHL)) should also enjoy opportunities.

But the biggest opportunity, says the analyst, lays with large loyalty programs, and nominates Coles Group ((COL)), Qantas Airways ((QAN)), Super Retail ((SUL)), Woolworths ((WOW)), and Wesfarmers ((WES)) in this respect.

Jarden says these companies should be able to use “social licence” to build brand trust and to expand into adjacencies.

Retail REITs, including Scentre Group ((SCG)) and Vicinity Centres ((VCX)), as well as consumer REITs such as Charter Hall Retail REIT ((CQR)), Homeco Daily Needs REIT ((HDN)), National Storage REIT ((NSR)), and Region Group ((RGN)) should also be able to profit.

Back To Psychosocial Safety

Jarden expects companies will need to gird their loins as employees are encouraged to speak up and checked out the performance of the financial sector on this front.

The analyst observes a SuperFriend survey of 10,000 Australian employees lists the three biggest drivers of psychological harm in the workplace as:

-Inappropriate workloads
-Poor change management
-Lack of recognition

The survey also found higher workloads correlated with lower job performances, which also meant the overburdened employees would then be denied a pay rise.

Jarden praised AMP Ltd ((AMP)) as an example of good practice on this front, after the company launched a safety and wellbeing framework that improved identification of psychosocial hazards and risk control.

Jarden also called out of Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) for implementing Employee Assistance Programs (EAP).

Macquarie Group ((MQG)) provides a psychological support service, Suncorp Group ((SUN)) offers a free wellbeing app and Insurance Australia Group ((IAG)) also offers an EAP. Commonwealth Bank ((CBA)) and Westpac ((WBC)) also provide support services.

Still, the vernacular of risk management and control and hazard identification all appear a tad obfuscating, making the issue more complex than it is.

Fair pay is not hard to implement, nor are appropriate workloads, appropriate recognition or safe workplaces. Change management can be tricky, but that simply requires companies employ and pay talented change managers and look outside comfortable “approved” supplier relationships.

In a separate paper on physical safety, Jarden finds no connection between staff turnover and fatalities to date, but notes available data are poor, and intends to examine this closely in future.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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