The World faces a growing challenge: rising energy demand and global warming. The clock is ticking and public debate vacillates between hopelessness and radical solutions. However, a viable solution to both problems is revealing itself. The future is bright...
There was a recent article in Canada's Globe & Mail outlining the fact that inflation in the energy sector, particularly tar sands development, is running at 50%. This is important as the tar sands in Alberta contain as much oil as Saudi Arabia and is part of the solution by America to wean itself off dependence on Mid-East oil. A closer look at some of the reasons for the high inflation….high costs of steel (the rising costs of coal to run the smelters) and metals, gas, labour (few engineers as demand out-stripping supply), energy costs used for transport, processing etc. … implies this must be running through the whole industry. Furthermore, the big elephant sites don't exist anymore so exploration and development costs are going through the roof. This could explain why M&A activity is picking up in the sector. It is more cost effective to buy in production and proven & probable reserves than to explore and develop. This means production and projects will be shut-down at a higher oil price than in the past. This could put a floor on oil prices at $50.
You may be right in thinking that input costs could decline in an economic slowdown. However, it is not certain that all input costs would decline at the same pace and to the same extent. Also, given the long lead times to projects, costs could be skewed. Furthermore, China is in a long term secular expansion in its economic development. A global slowdown would be temporary and China may not be impacted as much as other countries. China is crucial to the equation as demand for raw materials is most pronounced in a developing industrial power. Steel and metals are used for everything from infrastructure, cars, buildings, kitchen sinks etc. and China's growing middle class (estimated to reach 300m people by 2020, roughly equivalent to the population of the U.S.A.) will compete for these input materials. This should keep these input costs high. A very good friend, and successful fund manager, that I know just came back from an extensive business trip to China. His observation is that China's growth continues and he sees no signs of a slowdown. One further observation is that this rapid industrialization has created two large problems…dodgy lending and pollution. In an attempt to maintain long-term growth and raise living standards, China is now addressing these two issues. The Chinese have recently tightened-up the banking system to discourage speculative and high-risk lending practices. In addition, China is tightening pollution standards on new projects and attempting to address existing problems. China is keen to demonstrate its emergence as a global leader at the 2008 Olympics and will spend the next two years improving standards.
PROBLEM: China and the rest of the World have a problem. The demand for energy is rising and will stay high. Pollution, including global warming, is an increasing concern. Costs of production for fossil fuels is growing rapidly. Furthermore, the vast majority of available, lower cost, hydro-carbons are located in politically sensitive regions. Alternative energy solutions like hydro, wind and nuclear have environmental concern, long lead times, high production/maintenance costs (they also use expensive inputs in their production), limited growth (one can only dam so many rivers to produce hydro, wind farms have to be located carefully).
SOLUTION: There are only two solutions in the short and medium term. The first is demand-erosion brought on by a global recession and the other is a brighter solution…SOLAR. The solar sector is growing rapidly due to Government subsidization, economies-of-scale, globalization, improving technical and production efficiencies, lower costs. What is interesting is that the costs of production in the solar sector are going down while at the same time are going up in the fossil-fuel sector. The costs in the oil industry are rising more rapidly than anyone anticipated. This will keep oil prices higher than in previous cycles and spur demand for solar technologies. A virtuous circle for alternative energy solutions and solar in particular.
The one problem is a Silicon shortage. However, this appears to be more of a short-term problem. A growth slow-down and continued rising demand for solar cells should remove the capacity constraints by diverting silicon production away from the semi-conductor industry. Furthermore, we will see more resources deployed to mass produce silicon and cells which should drive production costs down even further. In the meantime, and regardless, I would recommend Solarworld (SWV.GY), a vertically integrated leader in the solar sector. In my opinion, this sector and this stock itself is a growth stock and not a cyclical. Any sell-off, should be a great opportunity to BUY.
There was a recent article in Canada's Globe & Mail outlining the fact that inflation in the energy sector, particularly tar sands development, is running at 50%. This is important as the tar sands in Alberta contain as much oil as Saudi Arabia and is part of the solution by America to wean itself off dependence on Mid-East oil. A closer look at some of the reasons for the high inflation….high costs of steel (the rising costs of coal to run the smelters) and metals, gas, labour (few engineers as demand out-stripping supply), energy costs used for transport, processing etc. … implies this must be running through the whole industry. Furthermore, the big elephant sites don't exist anymore so exploration and development costs are going through the roof. This could explain why M&A activity is picking up in the sector. It is more cost effective to buy in production and proven & probable reserves than to explore and develop. This means production and projects will be shut-down at a higher oil price than in the past. This could put a floor on oil prices at $50.
You may be right in thinking that input costs could decline in an economic slowdown. However, it is not certain that all input costs would decline at the same pace and to the same extent. Also, given the long lead times to projects, costs could be skewed. Furthermore, China is in a long term secular expansion in its economic development. A global slowdown would be temporary and China may not be impacted as much as other countries. China is crucial to the equation as demand for raw materials is most pronounced in a developing industrial power. Steel and metals are used for everything from infrastructure, cars, buildings, kitchen sinks etc. and China's growing middle class (estimated to reach 300m people by 2020, roughly equivalent to the population of the U.S.A.) will compete for these input materials. This should keep these input costs high. A very good friend, and successful fund manager, that I know just came back from an extensive business trip to China. His observation is that China's growth continues and he sees no signs of a slowdown. One further observation is that this rapid industrialization has created two large problems…dodgy lending and pollution. In an attempt to maintain long-term growth and raise living standards, China is now addressing these two issues. The Chinese have recently tightened-up the banking system to discourage speculative and high-risk lending practices. In addition, China is tightening pollution standards on new projects and attempting to address existing problems. China is keen to demonstrate its emergence as a global leader at the 2008 Olympics and will spend the next two years improving standards.
PROBLEM: China and the rest of the World have a problem. The demand for energy is rising and will stay high. Pollution, including global warming, is an increasing concern. Costs of production for fossil fuels is growing rapidly. Furthermore, the vast majority of available, lower cost, hydro-carbons are located in politically sensitive regions. Alternative energy solutions like hydro, wind and nuclear have environmental concern, long lead times, high production/maintenance costs (they also use expensive inputs in their production), limited growth (one can only dam so many rivers to produce hydro, wind farms have to be located carefully).
SOLUTION: There are only two solutions in the short and medium term. The first is demand-erosion brought on by a global recession and the other is a brighter solution…SOLAR. The solar sector is growing rapidly due to Government subsidization, economies-of-scale, globalization, improving technical and production efficiencies, lower costs. What is interesting is that the costs of production in the solar sector are going down while at the same time are going up in the fossil-fuel sector. The costs in the oil industry are rising more rapidly than anyone anticipated. This will keep oil prices higher than in previous cycles and spur demand for solar technologies. A virtuous circle for alternative energy solutions and solar in particular.
The one problem is a Silicon shortage. However, this appears to be more of a short-term problem. A growth slow-down and continued rising demand for solar cells should remove the capacity constraints by diverting silicon production away from the semi-conductor industry. Furthermore, we will see more resources deployed to mass produce silicon and cells which should drive production costs down even further. In the meantime, and regardless, I would recommend Solarworld (SWV.GY), a vertically integrated leader in the solar sector. In my opinion, this sector and this stock itself is a growth stock and not a cyclical. Any sell-off, should be a great opportunity to BUY.
