ESG Focus: The Little Big Things – 02-10-2024

This story features WOODSIDE ENERGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WDS

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/

The EU tackling the big issue of embedded emissions on imports; BlueScope’s ESG credentials; power demand to surge as the world adapts and Australia’s pathway to net zero emissions.

-Carbon pricing across borders
-BlueScope and Woodside CO2 emission updates
-Power consumption to soar
-What net zero emissions mean for Australian companies

By Danielle Ecuyer

Carbon Border Adjustment Mechanism shakes up trade 

The European Union is on the front foot when it comes to embedded emissions relating to the importation of iron, steel, aluminium, cement, fertilisers, hydrogen and electricity with the Carbon Border Adjustment Mechanism (CBAM) initiating a carbon price as at Jan 1, 2026.

Goldman Sachs believes the market does not fully appreciate the impact of the EU’s CABM on imports and highlights the example of Indian Steel where the charge could be up to a US$98/t variance in the market interpretation compared to the EU ETS (emissions trading scheme) or around 20% of current Indian steel prices.

Over the medium-term, the mechanism is expected to exert greater influence on global compliance of carbon pricing for exports with higher emitting Asian companies anticipated to “increasingly have their emissions priced”.

Around 24% of global CO2 emissions or circa 13bn tonnes of CO2 are now covered by 75 compliance mechanisms across the world. Regarding Australia, Goldman Sachs notes the review on carbon leakage is due on September 30 with recommendations on CBAM.

For reference, Australia’s Safeguard Mechanism covers 33% of emissions across aluminium, cement, electricity, fertiliser and steel with a carbon price of US$23/t and no pricing for CBAM with two hundred-plus facilities emitting over 100,000t CO2.

By way of comparison, the EU carbon price is US$77.90/t and New Zealand’s is US$37.9/t. Mainland China’s is US12.9/t and India does not have one.

Some of the possible consequences arising from the CBAM include the re-routing of trade based on embedded emissions, such that exports are re-directed to countries with less stringent regulations.

In contrast, the broker envisages more green capex investment and M&A activity, as well as evolution of a “Green” premium for lower carbon products. 

Woodside Energy‘s ((WDS)) US$2.35bn acquisition of OCI’s Green Ammonia Project in Texas is expected to generate a low carbon intensity ammonia at US$120/t compared to a US$100/t CO2 price. The project is anticipated to generate an internal rate of return above management’s 10% threshold for new energy projects.

Woodside is aiming to invest -US$5bn in new energy projects including 5mt p.a. emissions abatement capacity, the broker highlights, by 2030.

BlueScope continues the carbon challenge

BlueScope Steel‘s ((BSL)) Climate and Sustainability reports which were showcased at an ESG Briefing caught the eye of Macquarie and Jarden.

The company is on track for a -12% reduction in its steelmaking emissions by FY30 from the FY18 base with a -12.2% decline as at FY24. A -30% emissions intensity target reduction by 2030 and a net zero goal across all the business by 2050 are also included.

An estimated -$300m-$400m will be invested to achieve the 2030 climate aims with -$150m allocated from 2021-2025 and 40% or $66m of that amount spent to date.

Jarden views the new Climate Action Report as a positive move towards decarbonisation but suggests, as does Macquarie, some questions around the ambition levels for the 2030 steel making decarbonisation with the target achieved six years in advance.

The company has achieved less on the non-steel making targets. Jarden highlights most of the steel making reductions have been achieved from increased efficiency at Port Kembla, including higher scrap use and the expansion at North Star. Regarding non-steel making, BlueScope has reduced emissions by -8.4% against the -30% target reduction by 2030 since FY18.

Both brokers touch on some of the key “enablers” for decarbonisation including access to international cost competitive large scale renewable energy, competitively priced green hydrogen with natural gas as a transition energy source, and supportive policies across these aspects to facilitate the transition.

Jarden stresses the challenges of sufficient gas and renewable energy supplies while BlueScope waits for the development of a green hydrogen energy source.

Power up for the energy renaissance

Morgan Stanley is unabashedly bullish on power generation and the adjacent businesses to create sustainable, clean, reliable electricity grids.

A combination of onshoring/reshoring of manufacturing; the electrification of transportation, heating, cooling and the burgeoning growth in power demand for Gen.Ai vis-a-vis data centres is forecast to underpin 26% faster growth than the last decade in global power consumption through to 2030. Excluding China, the growth will be 2.4 times faster.

The broker highlights the expected growth is “unprecedented” and is leading to delays in the closure of coal-fired power stations (including Australia/South-East Asia), the restarting of mothballed nuclear power plants in the northern hemisphere and the fast tracking of gas-fired plants and renewable energy projects.

Morgan Stanley estimates 770GW of new power demand will be met by clean energy in 2030, globally, with a growing role for nuclear and gas.

In terms of the cost of solar production, the world has benefitted from more than a halving since the peak in 2022 of the cost of the solar panel supply chain. Supply of panels is estimated at more than two times demand and is at or below cash costs. Thank you, China.

Batteries supply is similar as factory utilisation rates have declined by -20% in the last three years with a doubling of capacity.

Regarding the wind turbine market, Morgan Stanley points to a two-tiered differentiation between Chinese price deflation to pre-covid levels versus turbines from Europe/Asia.

Morgan Stanley believes it is a “goldilocks scenario for power producers, grid operators and power equipment supply chains” especially ex-China.

Across the stock universe, the broker forecasts between a 90 to 290bps expansion in return on equity in 2025 in utility stocks as power prices respond to growing demand.

AGL Energy ((AGL)) is Overweight rated with a $12.88 target price.

Australian Climate Change Authority in focus

The Australian Climate Change Authority released its sectoral pathways to decarbonisation to support the country’s transition to net zero emissions by 2050.

UBS offered a summary for investors, highlighting eight transition points:

–“Australia’ electricity transition is in gridlock”.  The national electricity market needs to compound renewable energy capacity at 11% per annum to reach the 82% clean energy target by 2030. That is four times the current capacity at 39% renewables. Multiple factors are causing delays or gridlock, including planning, approvals and grid connection times. More work is required on streamlining and fast-tracking the processes.

Stocks: viewed as a positive for AGL and Origin Energy ((ORG))

–“EVs need price parity”. By 2030 all new cars will be required to have emissions lower by -60% compared to current standards. If vehicles are below the threshold, the vehicle will generate a credit and if they are above, a credit will need to be acquired. EV sales currently represent 10% of new cars. UBS believes the new national vehicle emissions scheme will support EV price parity.

Stocks: viewed as a negative for Viva Energy Group ((VEA)) and Ampol ((ALD))

–“SAF comparative advantage”. The decarbonisation of Qantas Airways ((QAN)) relies on sustainable aviation fuels, 10% by 2030 and 60% by 2050. Some 67% of the company’s refuel occurs in Australia. The report points to Australia’s capacity to produce 130% of domestic jet fuel demand or a $1.8bn market in 2030 and $16bn by 2050 given the country’s current feedstock including canola and tallow.

Stocks: viewed as positive for Nufarm ((NUF)), GrainCorp ((GNC)), Ridley Corp ((RIC)), Cleanaway Waste Management ((CWY)); decarbonisation for Qantas; hedge for Ampol and Viva Energy.

–“Resource demand is Australia’s largest transition risk and opportunity”. The country’s fossil fuel exports represent 2.6x Australia’s emissions or 2% of global emissions. The report points to a decline of circa -10%-20% in fossil fuel demand by 2030 and between -20% to -60% by 2050. Australia’s is also experiencing a commodity transition with growing demand for critical minerals. 

Stocks: long-term negative for Woodside Energy, Santos ((STO)), Whitehaven Coal ((WHC)), Coronado Global Resources ((CRN)). Positive for BHP Group ((BHP)), Rio Tinto ((RIO)), South32 ((S32)), Syrah Resources ((SYR)), and Talga Group ((TLG))

–“Safeguarding industry abatement with engagement”. UBS highlights 50% of industry emissions come from 20 facilities and 45% of safeguard emissions are generated from 15-ASX listed companies. As the carbon price rises, companies that have invested earlier in carbon abatement measures will most likely generate competitive advantages.

Stocks: engage with hard to abate emissions, Woodside, Rio Tinto, BHP, Bluescope Steel, Santos, Qantas, South32, Fortescue ((FMG)), Origin, Incitec Pivot ((IPL)), Viva Energy, Wesfarmers ((WES)) and Coronado.

–“The Australia carbon credit unit scheme is expected to reach $13bn by 2050”. The land sector is the only to achieve net negative emissions with carbon abatement from sequestration. Around 185mt CO2 is estimated by 2050. At current carbon prices, the value of sequestration could reach $500m by 2030 and $4bn by 2050. However, a $100 carbon price, which UBS believes is more realistic, would equate to a value of $1.65bn in 2030.

-“Rangeland crazing style is a challenge”. The domestic cattle industry generates 12% of Australia’s emissions from methane via digestion. Feed supplements can reduce emissions by -30% to -98% but the costs need to fall -90% or the carbon credit prices need to rise to $130 to make it financially possible for farmers.

-“Buildings are the embodiment of carbon”. Last calendar year 8% of the country’s emissions were generated from the manufacturing of building materials, including concrete and steel. Some REITS have set carbon emission targets with the National Construction Code including minimum standards from 2028.

Stocks: Mirvac ((MGR)) and Stockland Group ((SGP)) use lower-carbon products; GPT Group ((GPT)) has embodied carbon neutral for new builds; Charter Hall Group ((CHC)) targets net zero for new builds from FY30, Lend Lease Group ((LLC)) from FY40, Cromwell Property ((CMW)) from FY45 and Dexus ((DXS)) does not have a target.

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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