Extreme weather sends energy demand growth to nine-year high
BP warns of ‘vicious cycle’ as use of heating and cooling systems worsens emissions crisis
Extreme weather drove the growth in energy demand last year to its highest level since 2010, triggering warnings of a “vicious cycle” fuelled by reliance on heating and cooling systems that could worsen the world’s carbon emissions crisis.
Energy group BP said in its closely watched annual market review that energy consumption grew 2.9 per cent in 2018, led by China and the US, despite modest economic growth and strengthening oil and gas prices.
The rise spurred a 2 per cent increase in carbon emissions, the fastest since 2011 and equivalent to increasing the global passenger car fleet by a third, or just under 400m.
“If there is a link between the growing levels of carbon in the atmosphere and the types of weather patterns observed in 2018, this would raise the possibility of a worrying vicious cycle,” Spencer Dale, BP’s chief economist, is expected to say in a speech to launch the report on Tuesday afternoon.
The US saw an unusually high number of very hot or cold days last year, the most since the 1950s. China and Russia also saw greater fluctuations in temperature in 2018.
Such patterns could cause stronger growth in energy demand and carbon emissions as households and businesses seek to offset the effects, Mr Dale will warn.
Carbon dioxide in the atmosphere causes a greenhouse effect, trapping heat and increasing average global temperatures. Changes in atmospheric currents linked to climate change are also thought to contribute to extreme cold weather snaps in some areas.
Power generation is the largest source of energy-related carbon emissions, and as the world electrifies and demand for services such as air conditioning grows, the need to clean up the system will intensify.
“It hasn’t been possible to decarbonise the power sector quickly enough to offset the growth in demand,” Mr Dale, who was former chief economist at the Bank of England, will say.
Climate activists and investors have called on oil and gas companies to take responsibility for their role in global warming, urging them to move into lower carbon businesses.
BP has pointed to the world’s enduring reliance on fossil fuels and said it is aiming to increase output while ultimately reducing emissions.
But the latest statistics show the global energy system is not able to easily break this link as would be necessary to meet the Paris climate agreement goals.
There are grounds for us to be worried,” Mr Dale will say, and will add that there is a “growing mismatch between hopes and reality”.
According to BP, oil, gas and coal accounted for nearly three-quarters of the growth in energy demand last year, their highest share in five years.
Growth in renewable energy was less pronounced than in previous years but remained the fastest-growing source at 14.5 per cent.
Even as China and India have expanded into cleaner energy sources in recent years, the growth is not enough to meet demand and they are still building coal plants.
Coal saw its second consecutive annual pick-up in demand last year, led by Asia, after three years of declining consumption.
Natural gas demand expanded by 5.3 per cent, one of its strongest growth rates in more than 30 years, fuelled by a continuing switch to gas in China.
Foxconn ready to move production out of China if necessary
Taiwanese manufacturer seeks to reassure companies worried about US-China trade war
Foxconn has told companies worried about the trade war between Beijing and Washington that it can move electronics production for the US market out of China at short notice, adding that production will begin at its new Wisconsin plant by the end of next year.
The company said 25 per cent of its total capacity is now outside of China, and Liu Young-way, a member of the company’s newly formed top management committee, said it could help Apple, for example, move iPhone production out of China if necessary. But he noted that Apple had not yet asked for a shift.
The situation for the global economy and the industry “looks bleaker and bleaker, and the situation is unpredictable”, said Mr Liu.
Foxconn will start mass production of displays, car electronics and servers for the US market at its new plant in Wisconsin by the end of next year, Mr Liu said, and plans to invest $1.5bn and employ up to 2,000 people by the end of 2020.
At the first investor conference Foxconn hosted in its 45-year history, the world’s largest electronics manufacturer and largest assembler of Apple’s iPhone presented a new management structure designed to deal with the exit of Terry Gou, its founder, from day-to-day business as he runs for president of Taiwan.
Mr Gou is expected to resign from the post of chairman at the group’s annual general meeting on June 22, and be replaced by one of four new members of the board to be elected at the AGM.
Apart from Mr Liu, the head of the group’s semiconductor business, the new board members include Jay Lee, deputy chairman of Foxconn’s industrial internet unit, Lu Sung-ching, head of the company’s connector unit, and Tai Cheng-wu, chairman of Sharp, the Japanese technology company Foxconn acquired in 2016.
Mr Liu, who moderated the investor meeting and gave the main speech, said the new body was a formalisation of frequent meetings Mr Gou had held with the heads of group units and marked the transition to professional managers running the company.
Since the four board members who have a seat on the management committee will have a majority on the board of directors, the new committee can, in principle, vote through any decisions made by the new committee.
Senior executives made clear, however, that Mr Gou will continue to play a key role. Mr Liu said the company founder would retain a seat on the board.
“His future role [in the company] will depend on how the presidential campaign goes,” Mr Liu said, leaving open the possibility of Mr Gou’s return to a top role if he does not win the presidential election in January.
Addressing the slump in global demand for smartphones, the devices which have driven growth in the electronics hardware market for several years, Foxconn said it would focus on 5G, automotive electronics, the industrial internet of things, medical applications and semiconductors.
Management said the company expected to spend about NT$30bn to NT$50bn (US$955m to US$1.5bn) a year in capital expenditure, but these investments would be channelled more into developing technological capabilities required in these new fields.
Debt markets are pricing in a real risk of ‘Quitaly’
Credit default swap prices suggest investors are weighing Italy’s exit from the EU
Italy is the only country across the eurozone not to really benefit from the big rally in government bonds this year. The main culprit? The risk of exiting the euro-area, which is reflected in a permanent increase in Rome’s cost of borrowing.
If we look across bonds of 10-year maturities, the effects of the rebalancing of portfolios towards sovereign bonds are impressive. The yield on the German Bund is about 45 basis points lower than the turn of the year, pushing it in negative territory, while the French equivalent has lost 60bp. In Spain, bond yields are about 85bp lower, while even Greece is down about 160bp.
But for Italian bonds, there is a loss of just 40bp or so, from already-high levels.
The performance of Greek debt deserves particular attention, in the context of Italy. Both countries are carrying lots of debt (182 per cent of gross domestic product for Greece, and 133 per cent for Italy) and are plagued by low growth, bad productivity and subdued inflation.
The first factor to consider is that the Greek government bond market is very thin on liquidity. Just a few big deals by a few important players are enough to move prices. Of a total debt stock of about €400bn, only €71bn — less than a fifth — is traded on the secondary market, since the majority is frozen in the balance sheet of the European Stability Mechanism (ESM). Of the remainder, about €40bn has been deeply buried for years in the balance sheets of Greek banks, insurance companies and pension funds. Only about €30bn is available for trading.
After years of very limited interest in the market among investors, Greek banks increased their government bond holdings by about 30 per cent (€5bn) in January this year. Meanwhile, among foreign investors, US and French investment funds and banks have re-entered the market, heavily increasing their exposure to Greek sovereign risk.
Financial stability seems to justify this renewed interest in Greek debt. Defying some very bleak expectations, the government has been able to obtain a primary budget surplus of 3.9 per cent in 2017 and 4.4 per cent in 2018 — both well above the 3.5 per cent agreed with the European Commission, the European Central Bank and the International Monetary Fund (the so-called troika). Recent estimates envisage a stable budget surplus of about 1 per cent a year, after debt-servicing costs, until 2022.
A favourable picture emerges, too, from the reading of spreads on credit default swaps, which is the premium paid to buy protection against a default of Greek debt. Despite thin trading volumes, these instruments indicate an 80 per cent fall in the cost of insuring five-year bonds against default since 2016.
It is illuminating to examine the differences between the new CDS contracts based on the legislation introduced in 2014 by the International Swaps and Derivatives Association (ISDA), and the old contracts based on 2003 laws.
The new CDS contracts insure the holder against the redenomination of the debt in a new currency, while those based on the previous standard of 2003 do not. Obviously, the premium of the newer kind of insurance should be higher than the older one, and the difference could be seen as a measure of the probability that investors are assigning to an exit from the single currency. For Greece, this premium differential has flattened out at about 40bp, after a sharp decline following the last troika bailout. According to markets, Grexit risk is all but dead.
The situation for Italy, however, is strikingly different. In a more liquid CDS market, the gap between the two insurance premiums jumped from 20bp to 80bp in May 2018 after the unveiling of the coalition between the two outsider parties, the anti-establishment Five Star Movement (M5S) and the far-right League. Since then the gap has fluctuated above that level in response to government initiatives — such as the “citizens’ income” for the poor, and the proposal to create a parallel currency — and conflicting projections about the economy.
The insurance premium against Greece’s default risk (a five-year CDS price of about 300bp), then, can be broken down into three components. The first, the “generic” risk of being a peripheral country like Spain, counts for about 50bp, and the second comes from the idiosyncratic risk connected to the country’s economic weaknesses, which for Greece amounts to about 210bp. What is left, at about 40bp, reflects the risk of exiting the euro.
For Italy’s CDS premium of about 230bp, 100bp can be accounted as a compensation for idiosyncratic risks and about 80bp for the risk of Italy leaving the EU. This is more than a third of the total insurance premium, while for Greece the impact of this risk is much lower.
The market, then, has reassessed Italy’s exit risk: a phenomenon deeply connected with the presence of a new, conflict-ridden government unwilling to comply with EU budget rules.
Marcello Minenna is head of quants at Consob, the Italian securities market regulator. The views expressed are his own.
Gapping down
In reaction to disappointing earnings/guidance:
- LOVE -15.9%, ASNA -8.7%, CHS -6.2%, AGX -5%, HDS -4.7%
M&A news:
- PLUG -2.3% ( announces acquisition of EnergyOr)
- CVS -1.9% (Federal judge said to be near blocking CVS's now closed acquisition of Aetna, according to the NY Post)
- AAT -1.3% (acquires La Jolla Commons for $513.5 mln; announces proposed public offering of common stock)
- SFLY -0.5% (Shutterfly to be acquired by affiliates of Apollo (APO) in an all-cash transaction of $51/share)
Other news:
- CBAY -41.4% (reports topline 12-week data from an ongoing Phase 2b study of Seladelpar in patients with nonalcoholic steatohepatitis; Reductions in liver fat were minimal and not significant compared to placebo; reductions in markers of liver injury were robust and clinically meaningful)
- VG -11.7% (proposes private offering of $300 mln aggregate principal amount of convertible senior notes due 2024)
- GTLS -2.9% (files mixed securities shelf offering; plans to offer 4.9 mln shares with funds to be used on acquisition of Harsco's (HSC) Industrial Air-X-Changers business and to pay down debt)
Analyst comments:
- BYND -9.9% (downgraded to Neutral from Overweight at JP Morgan)
- SYMC -5.3% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- TEVA -0.8% (initiated with an Underweight at Barclays)
Gapping up
In reaction to strong earnings/guidance:
- CASY +9.4%
M&A news:
- BKS +2.9% (reports of competing Readerlink bid)
Select metals/mining stocks trading higher after China Iron Ore futures jump 6% on speculation that demand will continue to exceed production over the coming months:
- MT +6.3%, FCX +4.1%, X +3.7%, BHP +3.2%, RIO +2.7%, XME +2.6%
Other news:
- PRVB +20.4% (files for 5.5 mln share common stock offering; Amgen has agreed to purchase $20 mln of common stock in a private placement)
- AVGO +3.5% (Broadcom subsidiaries entered into statement of work with Apple [AAPL] providing for a supply arrangement for two years of new programs )
- VCYT +3.2% (announces new publication of data demonstrating real-world performance of the Afirma Genomic Sequencing Classifier in thyroid cancer diagnosis)
- TLRY +2% (Valens expands size and scope of agreement with Tilray)
- ZEAL +1.8% (presents elaborated results from pivotal Phase 3 study of dasiglucagon as treatment for severe hypoglycemia)
Analyst comments:
- NBEV +5.2% (initiated with Buy at Compass Point)
- LYFT +3.9% (upgraded to Positive from Neutral at Susquehanna)
- JBLU +3.6% (upgraded to Buy from Neutral at Citigroup)
- FORM +2.9% (initiated with a Buy at Needham)
- SESN +2.6% (upgraded to Buy at H.C. Wainwright)
- FB +1.5% (upgraded to Buy from Neutral at MoffettNathanson)
- VER +1.4% (upgraded to Buy from Underperform at BofA/Merrill)
- ZTS +1.2% (initiated with an Overweight at Barclays)
- PSA +0.8% (upgraded to Sector Weight from Underweight at KeyBanc Capital Markets)
Early premarket gappersGapping up:
- CASY +10.6%, NBEV +3.4%, VCYT +3.2%, TLRY +2.8%, FORM +1.8%, ZEAL +1.8%, BKS +1.5%, PRVB +1.5%, AVGO +0.6%
Gapping down:
- VG -11.7%, LOVE -10.8%, AGX -5%, HDS -4.3%, GTLS -2.9%, COUP -2.1%, AAT -1.3%, D -1.2%, ASNA -1%, SFLY -0.5%