The recently announced carbon tax has given birth to Australia’s renewable energy sector – and has given crisis-weary investors a new avenue to make money.
Australia’s top 500 polluters will be charged more for doing business, while a range of clean energy companies will be handed credits to offset the polluters down the road.
The tax is unlikely to do the mining sector much damage over the short term; the Government’s cash compensation and free carbon permits for affected companies will soften the blow for tax-affected companies over the first three years. A shock in Asia, for instance, is significantly more harmful for BHP shares than a nuisance carbon tax. Nevertheless, long-term shareholders should do the numbers to evaluate the tax’s impact on affected stocks, such as coal pure plays as well as domestically focussed coal miners facing growing competition abroad. The tax could reduce the competitive position of some miners compared to overseas supplies who don’t face a tax of this sort.
Australian Coal Association chairman John Pegler fears the repercussions on coal mines in Australia, citing underground coal mines in NSW as most at risk. He warns that some 17% of current black coal mines in Australia could be forced to close as a result of the tax.
The carbon tax legislation targets the Australia’s biggest 500 polluters across mining, electricity generation, manufacturing, property, transport, aviation, construction and building materials – charging them a fixed rate of $23 a tonne for three years, from mid 2012. After this date, the market will decide the rate charged.
The tax will lower net profit on pure-plays including Whitehaven Coal and New Hope Corporation, say analysts. Whitehaven is down 14%; New Hope Corporation, on the other hand, is up 16% in three months because it put itself up for sale. It’s rumoured that India’s Aditya Birla Group is interested as well as China’s Yanzhou Coal Mining Co Ltd and London-listed Xstrata.
BlueScope Steel & OneSteel
Australia’s manufacturing industry has faced the worst period since the Great Depression. Jobs have been axed and the share prices of Australia’s largest steelmakers have plummeted.
BlueScope Steel’s share price says it all, down 61% over the past year.
On top of other worries, OneSteel is reeling from the sudden iron ore price slump – and has reduced its earnings guidance to between $55 million and $75 million, down from $125 million a year earlier. The market wasn’t happy – selling OneSteel in droves; the stock has dropped 30% in one month.
Alleviating the pain somewhat, the Federal Government’s carbon tax bill offers $300 million to BlueScope ($180 million) and OneSteel ($120 million). Plus, some 95% of required permits will be handed over for free.
The cash compensation should reduce the burden over the short term.
Building and Construction Sector
The Master Builders Association reported that building and construction costs could increase by 2% under the tax, which impacts companies like Boral, Leighton Holdings and Brickworks. It also may hamper housing construction affecting a host of other property related companies such as Mirvac.
Boral reported that the tax would cost the company some $23 million in the first year rising to $40 million in the third year. Boral’s chairman said these costs would put the company at a disadvantage compared to its offshore competitors. Its shares are down 22% over the last 6 months.
Leading brick and tile maker Brickworks estimates that the tax will cut earnings before interest and tax by $12.8 million, and by $9 million after tax, in the first year. Brickworks is struggling under the weight of a toppy property market; brick factories in Melbourne and Sydney are likely to close before year end, with 239 employees losing their jobs. Nevertheless, Brickworks shares rose strongly during October, up 10% for the month.
Emissions-intensive aluminium will face significant costs under the carbon tax. Since electricity costs – powered by coal – makes up around 30% of aluminium smelting costs, aluminium giants such as Alcoa are undoubtedly concerned. A strong Australian dollar and rising input costs have already hampered profits for the company.
Alumina, partly owned by Russian giant Rusal, also complained leading up to the introduction of the tax about the squeeze on margins due to escalating labour costs and the high Australian dollar – not to mention the carbon tax. Alumina shares have sunk 20% in just three months.
Clean energy will be the sector to watch now that the carbon bill has been passed. Already players in the carbon-farming sector are rubbing their hands together in anticipation of a flood of new deals. The birth of a sector is a wonderful opportunity for investors to make good money if you back the right players. So get to know this sector over coming years.
In August we ran a feature, Do you need renewable energy stocks in your portfolio? outlining companies across wind, solar, geothermal, carbon and transport technologies.
The Government anticipates that Australia’s Clean Energy legislation will see the renewable energy sector grow 18 times larger by 2050. Under the Government’s reforms $100 billion is to be invested through to 2050 in the sector.
Share prices in the renewables sector continue to languish, however; wind company Infigen (formerly called Babcock & Brown Wind Partners) is down 65% this year and 11% this past month.
Coal energy stock White Energy shed 55% of its value in one week over a dispute with its Indonesian partner.
As the global financial crisis continues to rock markets, investors might prefer the likes of Australia’s largest power retailers such as AGL Energy (up 10% over the past three months), and Origin Energy (up 3% over three months).
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