The Week’s Talking Points—Supply Chains, Energy Drains, And Mind Games

In ‘The Week’s Talking Points’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.

The goal to have bluer skies is making the Chinese government curb production, as the country prepares to host the Winter Olympics. The power usage curbs imposed on large manufacturing are unprecedented.

These moves aren't surprising, says Manulife’s Rana Gupta, pointing to a sequence of events starting with the 2017 ‘Beautiful China’ policy document, the switch from coal to gas starting 2018 making it among the largest contributors to global gas demand, and now the latest curbs on production in key industrial areas.

Gupta and many others see these as developments that will continue and aid the ‘diversification out of China’ investment theme. Good news for businesses in India and the rest of South Asia.

China's pollution-led production cuts are the latest in a sea of supply-chain issues that corporates the world over are trying to tackle. These disruptions are not just China-driven; the general upward spiral in energy prices is not helping either.

Europe’s Energy Crisis

In the U.K., two gas suppliers went under in September, and the government there said it will not bail out failing energy suppliers. This even as Boris Johnson put the army on standby to address an acute petrol and diesel supply crisis triggered by a shortage of truckers.

Meanwhile, power producers in continental Europe are being forced to ask Russia for more coal to ease an energy crunch. After steady prices over the last four years, we are witnessing a substantial rise in global coal prices, going into what could be a cold winter for the northern hemisphere in more ways than one.

Growth Revival And Its Energy Costs

Domestic gas prices in India have been revised higher this week, to $2.90/mmBtu for October 2021 to March 2022 period, a hike of 62%. While this may seem very large, it is on expected lines. Considering that gas prices have shot through the roof the world over, this should not surprise anyone. It would probably trigger some price revision by the city gas distributors. Some of this could well result in heightened costs for companies that are heavily reliant on this form of energy. Remember, not only are the spot prices for imported gas high, even the domestically sourced gas is now 62% more costly. The Morbi ceramic tiles belt, autogas users, and the gas-based power plants would see their variable costs rise, assuming that the city gas distributors revise prices to try and maintain their margins. Higher gas prices would also increase the subsidy burden for the government. With every $1 per unit increase in the pooled price at which gas is supplied to fertiliser manufacturers, the subsidy requirement rises.

That’s for gas, what about coal? Will the shortages in Europe and China have a dramatic impact on the Indian landscape? Not so, says Prashant Jain of JSW Energy. Rising global coal prices may hinder imports, any price hike by Coal India will be treated as pass-through by power producers. However, Jain does believe that India has underinvested in the power sector from 2012-2020, and at some point in time over the next few quarters, India will face a demand-supply mismatch if the economic growth comes back as expected.

If corporate India increases capacity, then the power consumption will move higher in the process. Lack of financing from banks for thermal projects as well as ESG concerns would ensure that any fresh capacity addition that happens will happen in the renewable space and not in the thermal space, and that is evident from how capex plans are being unveiled by Tata Power, JSW Energy, and other big firms. From an investment perspective, while power generation companies may already be discounting some of these upsides, is there then the potential of a very large business opportunity for renewable energy equipment suppliers? Point to ponder.

A Counterview On The China Curbs

GMM Pfaudler is not a massive company by market capitalisation, valued at under a billion dollars. But it is the leader of glass-lined equipment in India, and with the acquisition of Pfaudler Inc, is arguably the dominant force in that business in the country. Glass-lined equipment is corrosion-resistant material used in varying processes by companies across a wide range of sectors, from the production of pharmaceuticals to specialty chemicals and polymers. GMM Pfaudler, which does business in the Americas, Eastern Europe, China and is the market leader in India, says the company has seen very little disruption in its business or the business of its customers due to the latest production curbs by China. Freight rates, too, have moderated after staying high for a while.

CVs In The Fast Lane

Even as the auto sales numbers for the month of September trickle in, recent reports forecast CV sales doing well, both on absolute and relative terms. Truck demand continues to recover sequentially and registrations for September were 5% above 2019 by the third week itself. The big question, therefore, is whether a cyclical upturn in MHCVs is imminent? Vinod Aggarwal, MD of Volvo Eicher, says replacements have been overdue, that the CV industry's business right now is clawing back the lows of the last three years. Small and large transport operators have not undertaken major replacements, and that should help the first leg of a pullback in CV demand. The next triggers need infrastructure spending and the overall economic recovery to pick up steam.

And Finally...

I end this week's piece with this story about the Netflix hit ‘Squid Game’, which was among the biggest talking points when it comes to content worldwide, and something that may spur people to try and hunt for companies that have the potential to produce such content. As difficult as it is to foretell, the gains made by the stocks of the companies associated with this show and its stars would prompt people to look at content creation more seriously. That hasn’t quite happened in India yet, but since human attention may be the new oil, one never knows.

Niraj Shah is Markets Editor at BloombergQuint.