Subject to parliamentary approval, the Labour/Greens government’s proposed two-stage plan for a carbon price mechanism will commence this year. The plan is for a flat price to apply for three to five years, before moving to a market traded price.
A few dozen of Australia’s highest-emitting polluters are expected to pay a whopping 75 per cent of the government’s proposed carbon tax-take between them. This means identifying those companies likely to suffer most at the hands of a carbon price should be patently obvious.
Electricity generators will be the worst affected and are expected to pay 56 per cent of the carbon price directly between them. But a carbon tax is also forecast to deliver a net-negative to myriad listed stocks across different sectors.
As a case in point, stocks that export to global markets or that compete with imports domestically, may be less competitive with global rivals that aren’t yet subject to a carbon price. Similarly, many local manufacturers may struggle to pass on the costs of a carbon tax onto customers.
Up to 20 listed stocks are included within Australia’s top 50 carbon emitters, but there’s no correlation between volume of the carbon emission and the EPS impact. For example, while Santos (STO) and Rio Tinto (RIO) are among the country’s biggest emitters, the impact on their EPS is only expected to be -3 and -2 per cent respectively.
By comparison, rival aviators Virgin Blue (VBA) and Qantas (QAN) will both be hit hard. It’s not clear whether or when aviation will receive any compensation. But assuming it doesn’t, Elaine Prior analyst with Citi estimates Qantas – which also has non-Australian related emissions – to incur a carbon cost of around A$74 million or $12.9 million net profit in full year 2013, rising to around A$150 million in full year 2020 or $26.2 million net profit.
Based on her ‘most-likely-case’ carbon tax scenario, its heavy industry that is most exposed to a carbon tax. She expects the biggest carbon impacts to be on Alumina (AWC), Caltex (CTX), Adelaide Brighton (ABC), CSR and Macarthur Coal (MCC) – accounting for a 5.4, 5.1, 3.3, 2.7 and 2.4 per cent respectively of net profit in full year 2013. Even after passing on around 75 per cent of the carbon cost to fare-paying customers, JP Morgan expects Virgin Blue and Qantas to incur the biggest carbon price EPS-hits of -28 per cent and -12 per cent respectively over full year 2013-2015.
The magnitude of any carbon tax depends on both the cost-per-tonne, and the level of compensation that trade-exposed industries receive. Much of the stgil will be in the policy detail, notably around the level of free permits to “emissions intensive trade exposed” industry (EITEs) like steel, cement and aluminium, since prices are set on international markets. According to a recent analysis of power supply contracts, the energy market is pricing in a 50 per cent chance that a carbon price will not be in place by the middle of next year as planned.
But assuming a carbon pollution reduction scheme (CPRS) is implemented similar to that proposed under the former Rudd government, industries like steel-making will receive compensation for around 95 per cent of the carbon tax. Without compensation, rival broker UBS estimates that a $25/tonne carbon tax would shave $1.60 off Bluescope Steel’s (BSL) net present value (NPV) and $.075 off OneSteel’s (OST) NPV.
Assuming the compensation is similar to that proposed under the CPRS, UBS suggests the EPS impact on BlueScope, Australia’s seventh largest carbon emitter – and the largest emitter among listed stocks – is expected to be in the vicinity of -5 per cent. The total estimated cumulative cost to BlueScope for the first eight years of the scheme is expected to be at least $450 million.
Assuming coalminers are able to hand-ball on the cost carbon, Bluescope’s chairman Andrew Purvis says the cost could be as much as $1.2 billion. Equally concerning to Bluescope and other casualties of a carbon tax is where the price of carbon will rise to over time – with some analysts speculating a price of $70-$100/tonne over the longer term.
The market has been quick to vent its fear over carbon tax uncertainty, with the Bluescope and OneSteel share price down by around 30 per cent since Prime Minister Gillard announced a carbon tax consultation process last February. Currently trading at less than a fifth of the $9.95 it traded at in May 2007, Bluescope Steel was our Bear of the Week four weeks ago – and it has dropped a whopping 20% since then.
Explosives and chemicals group Orica (ORI), ranked 36th in Australia’s carbon emission-stakes – can expect an ESP hit of a similar magnitude to Bluescope. Assuming the carbon price is set at $25/tonne, Orica’s 2.3 million tonnes of annual Co2 will shave around $60 million off the firm’s $6 billion in annual revenue.
Over the last five years, Orica has cut its carbon output by 57 per cent, and is expected to continue doing so in the wake of a carbon tax. But the jury’s out on how much of Orica’s carbon tax cost could be passed on to customers, especially given that much of its product is sold on three-year contracts.
As long as mining tax continues to take centre stage, investors won’t turn their attention to the impact of a carbon tax on the mining sector’s cost structure. Amongst miners, some analysts expect mineral sands miner Iluka (ILU) and Macarthur Coal (MCC) to be worst affected – with EPS hits of -4 per cent and -3 per cent respectively.
While the carbon tax will be a more significant factor for these sub-sectors of mining, the net impact on industrials is expected to be much more evident. Based on JP Morgan estimates of $25/tonne, the carbon tax will deliver a negative impact on EPS of an average 2.4 per cent, with big retailers like Woolworths (WOW) expected to take -2 per cent EPS hit.
But not all stocks are casualties of a carbon tax, with energy companies Origin Energy (ORG) and AGL Energy (AGK) expected to see their EPS rise by 1 and 2 per cent respectively over the first three years. Both AGL and Origin stand to profit handsomely from the extra demand for gas-generated power.
Origin’s Australia Pacific LNG (APLNG) joint venture in Gladstone recently signed a $90 billion deal with Sinopec of China to export gas. What’s expected to make this and other LNG deals look even more favourable is a strong likelihood that government will stump-up with an even better deal to assist LNG producers than initially offered under the former CPRS. The LNG industry argues that’s it’s deserving of such deals, especially given that for every tonne of LNG-related Co2 emissions in Australia there’ll be up to seven tonnes saved globally – because the gas is essentially substituting for coal.
20 Biggest EPS Hits
Impact over FY2013-2015 of carbon price at $25/tonne
|Company||EPS impact %|
|Virgin Blue (VBA)||-28|
|Bluescope Steel (BLS)||-5|
|Transfield Resources (TSE)||-4|
|Iluka Resources (ILU)||-4|
|Gujarat Coking Coal (GNM)||-4|
|QR National (QRN)||-4|
|Incitec Pivot (IPL)||-3|
|Adelaide Brighton (ABC)||-3|
|Macarthur Coal (MCC)||-3|
|Leighton Holdings (LEI)||-3|
|Rio Tinto (RIO)||-2|
Carbon impact as a percentage of full year 2013 net profit
At $25/tonne – lower levels of industry assistance
|Company||% of FY13 NPAT|
|Adelaide Brighton (ABC)||3.3|
|Alumina Base Case||3.6|
|Alumina(94.5% for everything)||2.7|
|BHP Billiton (BHP)||1.1|
|Energy Resources of Australia (ERA)||1.1|
|Incitec pivot (IPL)||1.8|
|Macarthur Coal (MCC)||2.4|
|Rio Tinto (RIO)||1.1|
Source: Citi – based on most likely scenario II
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