G7: why major economies are delaying a break with the fossil fuel industry
The climate crisis is certain to be a hot topic at the G7 summit in Cornwall. While the leaders of the world’s richest countries agree in theory on the need to reach net-zero emissions by 2050 at the latest, they remain faithful to a fossil fuel industry reluctant to substantively change its business model.
By George Ferns, lecturer in Management, Employment and Organisation, and Marcus Gomes, lecturer in Organisation Studies and Sustainability, Cardiff University
A recent report by the International Energy Agency, a typically conservative advisory body, argued for an immediate ban on new fossil fuel projects. But investments by oil, gas and coal companies into finding new sources continue, as does industry lobbying to undermine regulation. The environment ministers of the G7 countries committed to end funding for new overseas coal projects by the end of 2021. But 51% of their Covid-19 economic recovery funds – a total of US$189 billion (£133 billion) – paid between January 2020 and March 2021 were earmarked as financial aid for the fossil fuel industry. Worse, US$8 of every US$10 dedicated to non-renewable energy was paid with no conditions on these companies to reduce their emissions.
Why does it seem so hard for G7 leaders to match their words with action when it comes to the fossil fuel industry?
Betting on the long-term business case
Despite setbacks in volatile markets and oversupply risks, there is still a lot of money to be made from extracting, producing and selling hydrocarbons. Demand for coal has plateaued, but oil and gas demand is predicted to rise at least for the next 15 to 20 years, particularly in emerging economies such as China and India.
This puts G7 leaders in an awkward position. On the one hand, governments need to reboot economic growth after the pandemic slowdown – a profitable energy sector nourished by rising demand abroad is welcome, even though hydrocarbon extraction can be especially polluting in developing countries.
Governmental support for the industry in the form of subsidies or tax breaks artificially inflates the profitability of fossil fuels, in turn making renewables a less attractive investment. Put simply, it is less risky and more profitable to – at least for now – invest in oil and gas.
The fossil fuel industry continues to shed public support, but it can rely on the fact that it’s embedded within a complex system of consumers, suppliers and contractors, politicians and the media. The cause-and-effect relations that define such an intricate system often produce unintended outcomes.
This interdependency is referred to as carbon lock-in. Economies have evolved in such a way that they perpetuate an energy landscape dominated by fossil fuels and plagued by an inability to radically change.
Not only does carbon lock-in result in inertia, it causes a tragedy of the commons-type problem. Big oil companies such as BP, Exxon Mobil and Shell are unlikely to make meaningful changes until the rest of the system acts in unison. National oil companies and smaller privately owned fossil fuel companies comprise the bulk of known fossil fuel reserves. But they often evade the spotlight and so can operate with more freedom. For a big oil company to make high-risk changes to its business model while others enjoy a free ride would be seen as a bad business decision.
Lock-in, as the name suggests, is very difficult to break. That said, G7 members are powerful nodes within this complex network. Strong leadership – such as divestment from fossil fuels and strong support for renewables – would cause reverberations throughout the whole system. But strong commitments coupled with counter-intuitive policies only send a signal that meaningful changes aren’t coming.
People working in the fossil fuel industry often stay in the sector for their entire career – starting off as students of engineering or geoscience in departments funded by the industry, working all over the world and then heading into management positions.
The industry’s identity is predicated on certain values that have existed since the early days of hydrocarbon exploration, including, as one study found, a deep trust in the potential of science and technology to further humanity’s control over nature and to drive progress and economic development.
The ideological commitments of leaders in the fossil fuel industry will take a firm challenge from governments to overcome. It’s clear from financial decisions in the lead up to the summit that G7 leaders aren’t quite up to that test yet. But the meeting in Cornwall is their opportunity to signal that that cosy relationship is finally coming to an end.
Five satellite images that show how fast our planet is changing
Satellite observations can provide far more insights than that. In fact, they are essential for understanding how our planet is changing and responding to global heating and can do so much more than just “taking pictures”.
By Jonathan Bamber Professor of Physical Geography, University of Bristol
It really is rocket science and the kind of information we can now obtain from what are called Earth observation satellites is revolutionising our ability to carry out a comprehensive and timely health check on the planetary systems we rely on for our survival. We can measure changes in sea level down to a single millimetre, changes in how much water is stored in underground rocks, the temperature of the land and ocean and the spread of atmospheric pollutants and greenhouse gases, all from space.
Here I have selected five striking images that illustrate how Earth observation data is informing climate scientists about the changing characteristics of the planet we call home.
1. The sea level is rising – but where?
Sea level rise is predicted to be one of the most serious consequences of global heating: under the more extreme “business-as-usual” scenario, a two-metre rise would flood 600-million people by the end of this century. The pattern of sea surface height change, however, is not uniform across the oceans.
This image shows mean sea level trends over 13 years in which the global average rise was about 3.2mm a year. But the rate was three or four times faster in some places, like the southwestern Pacific to the east of Indonesia and New Zealand, where there are numerous small islands and atolls that are already very vulnerable to sea-level rise. Meanwhile, in other parts of the ocean, the sea-level has barely changed, such as in the Pacific to the west of North America.
2. Permafrost is thawing
Permafrost is permanently frozen ground and the vast majority of it lies in the Arctic. It stores huge quantities of carbon but when it thaws, that carbon is released as CO₂ and an even more potent greenhouse gas: methane. Permafrost stores about 1 500 billion tonnes of carbon – twice as much as in the whole of the atmosphere – and it is incredibly important that carbon stays in the ground.
This animation combines satellite, ground-based measurements of soil temperature and computer modelling to map the permafrost temperature at depth across the Arctic and how it is changing with time, giving an indication of where it is thawing.
3. Lockdown cleans Europe’s skies
Nitrogen dioxide is an atmospheric pollutant that can have serious health impacts, especially for those who are asthmatic or have weakened lung function, and it can increase the acidity of rainfall with damaging effects on sensitive ecosystems and plant health. A major source is from internal combustion engines found in cars and other vehicles.
This animation shows the difference in NO₂ concentrations over Europe before national pandemic-related lockdowns began in March 2020 and just after. The latter shows a dramatic reduction in concentration over major conurbations such as Madrid, Milan and Paris.
4. Deforestation in the Amazon
Tropical forests have been described as the lungs of the planet, breathing in CO₂ and storing it in woody biomass while exhaling oxygen. Deforestation in Amazonia has been in the news recently because of deregulation and increased forest clearing in Brazil but it had been taking place, perhaps not so rapidly, for decades. This animation shows dramatic loss of rainforest in the western Brazilian state of Rondonia between 1986 and 2010, as observed by satellites.
5. A megacity-sized iceberg
The Antarctic Ice Sheet contains enough frozen water to raise global sea level by 58 metres if it all ended up in the ocean. The floating ice shelves that fringe the continent act as a buffer and barrier between the warm ocean and inland ice but they are vulnerable to both oceanic and atmospheric warming.
This animation shows the break-off of a huge iceberg dubbed A-74, captured by satellite radar images that have the advantage they can “see” through clouds and operate day or night and are thus unaffected by the 24 hours of darkness that occurs during the Antarctic winter. The iceberg that forms is 1,270 km² in area which is about the same size as Greater London.
These examples illustrate just a few ways in which satellite data are providing unique, global observations of key components of the climate system and biosphere that are essential for our understanding of how the planet is changing. We can use this data to monitor those changes and improve models used to predict future change. In the run-up to the vitally important UN climate conference, COP26 in Glasgow this November, colleagues and I have produced a briefing paper to highlight the role Earth observation satellites will play in safeguarding the climate and other systems that we rely on to make this beautiful, fragile planet habitable.
Jonathan Bamber receives funding from the UK Natural Environment Research Council, the European Commission Horizon2020 Framework Programme and the European Space Agency.
Wind power producers may provide immediate surplus power
The South African Wind Energy Association has engaged with its members to ascertain if the sector is able to provide additional power, in line with the recent call for additional energy from existing Independent Power Producers by the Department of Mineral Resources and Energy (DMRE).
The Department of Mineral Resources and Energy (DMRE)’s proposed ‘Additional Megawatt Programme’ will see the Department entering into agreements with existing renewables Independent Power Producers (IPPs) to procure additional energy that wind and solar farms could supply, over and above, what is currently allowed under their existing Power Purchase Agreements.
“We welcome this call from government and can confirm that several of our IPP members have indicated that they will be responding. They are of the view that it is possible to run their wind turbine generators (WTG) at higher power output or include a power boost to increase generation output of already installed wind turbines,” explained Ntombifuthi Ntuli, CEO of SAWEA.
She added that the industry will be seeking clarification on practical details of the ‘Additional Megawatt Programme’, but that the response has been positive overall. When the country reached unprecedented Stage 6 load-shedding in 2019, SAWEA called for the immediate release of available additional capacity from operational wind farms into the national grid, by lifting the Maximum Export Capacity (MEC) on all operating wind farms.
“Earlier this month, the IPP Office issued a call to all operational IPPs with projects in Bid Window 1 to 4, to make available additional capacity from their operational plants, in order to contribute towards closing the power supply capacity gap. It is encouraging to see that industry proposals are being taken seriously by government and are now being implemented,” said Ntuli.
Due to demand exceeding available supply capacity, South Africa has been plagued with power shortages for a long time. This is despite government’s efforts to implement a number of programmes to close the capacity gap, which include the announcement of preferred bidders for the RMIPPPP and issuing of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) Round 5 Request for Proposals (RFP) as well as announcing future procurement plans.
“Eskom’s Electricity Availability Factor has been below recommended levels for a very long time, as demonstrated by the protracted load-shedding that our country has been experiencing for well over a decade now. This indicates an urgent need to procure new generation capacity, both in the long-term and short-term, to bring the available capacity to healthy levels again,” added Ntuli.
Scatec’s winning bid brings SA into the future with progressive renewable energy plan
Renewable energy power producer Scatec has announced the awarding of their bids to supply South Africa with 150 megawatts of dispatchable power through the use of renewable energy. The bid has been awarded as part of the national Risk Mitigation Independent Power Procurement Plan (RMIPPP) by the Department of Mineral Resources and Energy.
It represents government’s response to the current energy crisis, in which power shortfalls have threatened to bring the country’s economy to its knees. Unlike its predecessors, the RMIPPP is a progressive, energy-agnostic scheme and therefore not prescriptive when it comes to power generation technology, but rather focused on technical outputs, driven by power system requirements.
On that basis, Scatec opted to present solar plus battery only bids; going toe-to-toe with fossil fuels and other hybrid configurations. It should be noted that the Scatec bids are the only renewable energy only bids awarded in this tender process – showcasing the company at the forefront of future-oriented power delivery in South Africa and indeed globally. The plan aligns with government’s 2019 Integrated Resource Plan – a living document that articulates South Africa’s envisioned transition to a cleaner, mixed energy supply, with greater emphasis on renewable power.
Jan Fourie, Scatec’s General Manager for Sub-Saharan Africa, states that the project site will house over 2-million individual solar panels, reach roughly 10 kilometers from end to end, and will require a total capital expenditure of around $1-billion. “To our knowledge, this may well be the world’s largest solar and battery storage hybrid plant,” he adds. The initiative will consist of solar arrays totalling 540MWp, all situated at the same site in the sunny Northern Cape.
Each project will be capable of generating 50 megawatts of dispatchable power (or Contracted Capacity, in RMIPPPP terms) and will be co-located with cutting-edge energy storage technology plants using lithium-ion batteries, in aggregate having a capacity of 1.1 gigawatt hours, allowing for an unprecedented level of output control and dispatchability.
The site has been overly capacitated to generate agreed-upon power even in the lowest-performing solar months – with 22 years of hourly historical data being studied to ensure optimal performance. Together, they will meet the requirement to be dispatchable, according to market needs, and be fully dispatchable daily from 5:00 am to 9:30 pm.
“Totalling an impressive output capacity of 150 megawatts of clean, dispatchable power, the projects will play a major role in closing the energy gap in South Africa and mitigating the threat of continued load shedding in coming years. These bids will also contribute large amounts of skilled and unskilled jobs to the South African economy during the construction phase, and generate substantial long-term employment going forward,” says Fourie.
Scatec, who is present on four continents and headquartered in Norway, brings global experience in a diverse range of renewable power generation projects, having been active in the South African market since 2010. From their local offices in Cape Town, the group operates and manages an impressive portfolio of 6 utility-scale solar PV sites and operations, including the Kalkbult plant in the Northern Cape (the first utility-scale solar plant in SA), as well as the recently completed 258 MW Upington Solar Complex.
“We are proud to be the country’s leading supplier of solar power, with an array of plants and projects totalling 448 megawatts of renewable energy.”
Jan Fourie, Scatec’s General Manager for Sub-Saharan Africa
The call for bids has attracted power industry heavyweights who will collectively supply a grand total of 2 gigawatts of electricity by July 2022, in order to reduce the impact of load shedding on the national economy in a timeous manner.
Fourie believes that the bid comes at a crucial time in the energy-landscape where renewables are poised to become more cost-effective than ever before, and in which many global fossil-fuel giants are now pivoting their efforts and resources towards renewables.
Scatec’s bid is based on renewables, innovative battery, and storage technologies alone, and represent an appreciable contribution towards South Africa’s cleaner energy goals – part of a broader global effort to reduce carbon emissions and ameliorate global warming – as outlined in the IRP.
“Our work demonstrates a commitment to a brighter, greener future globally, and stands as an important testament to the fact that renewables are now fully dispatchable and can compete in the market against traditional, less sustainable energy resources,” Fourie says.
Developing countries need to chart their own course to net-zero emissions
Translating complex climate science into language people understand has always been difficult. At various times, the aim of different climate policies has been holding average global temperature rise to 2°C or 1.5°C or ensuring emissions peak by a particular year. Net-zero targets are the most recent attempt to simplify the climate crisis in order to make it manageable.
The Paris Agreement called on countries to balance greenhouse gas sources, such as cars and factories, with ways of removing emissions from the atmosphere, such as forests and carbon capture technology, in the second half of this century. A report by the Intergovernmental Panel on Climate Change, released in 2018, examined how temperature rise could be limited to 1.5°C and urged the global community to reach net-zero emissions of carbon dioxide by 2050.
Framing the effort to tackle climate change this way has proved useful. More than 30 countries have net-zero targets set or proposed in law and existing policies, while more than 120 countries are discussing their own net-zero targets. Some of these targets concern all greenhouse gas emissions, others just carbon dioxide, and most set 2050 as the deadline.
Same goal, different paths
There is a risk that the call for global emissions to reach net zero by 2050 is seamlessly translated into a call for each country to announce net zero by 2050 targets. In recent months, leaders from the US and the UK and the UN Secretary-General have suggested that a net-zero emission target consistent with reaching global net-zero carbon by 2050 is an important yardstick by which climate pledges by major economies are to be judged.
Yet how much each country has to do depends on how fast other countries reach net zero. So how should the international community decide the relative pace of change? Here, the hard-won agreement at Paris provides some guidance. It recognises that emissions will take longer to peak in developing countries because addressing poverty is an overriding challenge. For the whole world to reach carbon neutrality in 2050, developed countries have to reach net-zero carbon emissions earlier.
The Paris Agreement formulation makes sense. It would hardly be fair to ask a country like India to reach net zero at the same time as the UK. India has yet to peak its emissions and currently emits less than half of global average emissions per capita, while the UK peaked its emissions two decades ago at a much higher GDP and its emissions remain above the global average.
The Paris Agreement also requires that developing countries receive support – in the form of money or green technology – to speed up their transition. Net-zero targets are a powerful way to signal common cause between nations. But retaining that sense of solidarity requires these targets to be consistent with demands for climate justice.
This is not only fairer, but also makes for smarter politics and so increases the chances of real action. The Paris Agreement broke a long-standing political deadlock by allowing each country to develop its own nationally determined contribution to cutting global emissions. This let national governments tailor climate policy in order to maximise its appeal to people at home. In countries such as the UK, the idea of reaching net zero emissions as soon as possible has considerable support. In other countries, winning political support may require climate action to be embedded in other goals.
In South Africa, there is crippling inequality and unemployment stood at 43% in late 2020. Emissions cuts can only proceed if jobs are created during a transition from a coal-based economy to a low-emissions one, particularly for young people.
In India, too, job creation is paramount. So are environmental concerns like air pollution and unequal access to reliable energy. This may require action in the electricity sector to address these development challenges and prevent the future economy becoming locked in to high-carbon energy sources.
Both South Africa and India’s domestic priorities can be translated over time into a clear formulation for reaching net zero emissions. But that translation between domestic development narratives and global obligations has to be undertaken, not presumed. Instead of a single net zero transition, there must be space for multiple transitions, consistent with climate justice and tailored to different national contexts.
Net zero targets have to be credible to be meaningful – long-term statements of intent are not enough. Doing more, earlier, is necessary. Recent pledges by leaders for action by 2030 are a step in the right direction. These declarations should be embedded in Paris Agreement processes to ensure countries are accountable. Equally important is addressing the often ignored “net” in net zero. National plans should not be over-reliant on the future existence of technology to remove emissions. Any pledges based on purchasing emissions credits from other countries must be credible.
Net zero can be an important focus for climate action. But it must not become a set of blinkers that seeks to compel all countries down a single path. Instead, we need credible, just transitions to net zero.
Nersa to oppose Eskom High Court application to review energy regulator decision on the regulatory clearing account and supplementary applications for the 2018/19 financial year
The National Energy Regulator of South Africa (NERSA) confirms that at its meeting held on 28 April 2021, the Energy Regulator resolved to oppose the High Court application brought by Eskom Holdings SOC Limited (Eskom) against NERSA to review and set aside the Energy Regulator’s decision pertaining to the approval of a Regulatory Clearing Account (RCA) balance of R13.271-billion for the 2018/19 financial year, and the Energy Regulator’s decision to grant Eskom’s supplementary revenue balance of R1.288-billion in respect of the 2018/19 financial year.
The Eskom judicial review application was received on 12 April 2021. In arriving at the decision to oppose the application, NERSA considered the factual matrix, applicable regulatory and legal principles. NERSA further considered the impact of Eskom’s continuous court review applications on the Government’s economic recovery plans, as well as hardships on customers. In this regard, interested stakeholders are welcomed to join NERSA in opposing the review application if they consider that the Court decision may negatively affect them.
NERSA will be opposing the judicial review application within the required time frame and process.
‘Sacred forests’ capture carbon and keep soil healthy
Michele Francis | The Conversation
In parts of West Africa, patches of forest have been preserved for long periods of time because of their cultural or religious significance. These “sacred forests” are believed to be inhabited and protected by gods, totem animals or ancestors. Local communities have their own rules prohibiting reckless harvesting of timber and game, which have protected the sacred forests over many generations.
The forests cover several hundred square kilometres, and may be the remnants of a once continuous forest along the West African coast. The historically dense forest ecosystem in West Africa has been reduced by over 80% since 1900. The age of the remaining patches means they often contain more biodiversity than surrounding areas of agricultural land. They are the last remnants of ecological niches.
Not only are they culturally valuable and biodiverse, but these ancient forest remnants are also crucial to the fight against climate change. They also improve agricultural output. These were the findings of a recent study I co-authored, looking at the soil types in and around a sacred forest in northern Togo. The parent material of these soils is not calcareous, (are not lithogenic carbonates), thus making them an important carbon sink.
I calculated that one hectare of forest is able to permanently remove as much carbon dioxide from the atmosphere as is released by a power station burning nearly 16 tonnes of coal.
Organic matter – dead leaves and remains of trees – which has been on and in the soil for a long time and decomposing that makes the difference both to soil fertility and to carbon storage. As the trees and plants die, or the dead leaves drop down, these are slowly worked into the soil by the tiny creatures that live in it.
This stable ecosystem of organic matter can help fight climate change because of its potential for carbon sequestration – the capturing and storing of atmospheric carbon dioxide. This is relevant in global climate change policies.
The soil in the area is also important because it could contribute to yields in agricultural production. Adding organic matter to farmland areas surrounding these forests can increase the agricultural yields by “copying” the nature of these sacred forest soils.
Litter processors capture carbon
Forests remove large amounts of carbon dioxide from the atmosphere and bind it into their leaves. When trees die and eventually decompose on the forest floor, this carbon dioxide is released back into the atmosphere, unless it’s captured and stored in a more permanent form. My research showed that this carbon capture was taking place on the floor of a sacred forest on a farm in Northern Togo.
In the forest soil, I found evidence of the activity of litter processors, such as oribatid mites. They decompose the organic carbon and their biological activity helps to form a mineral called calcite in the soil. Calcite forms when root respiration and microorganisms decomposing organic matter generate carbon dioxide. This process reacts with soil moisture to form dissolved inorganic carbon and later precipitates as calcite.
The calcite in the floor of the sacred forest is formed like needle fibres and rods. These shapes are typical of biological origins.
None of these features are present in the soil from the degraded lands surrounding the sacred forests. The surrounding soils are very low in organic matter. They are non-calcareous and show very little microfaunal activity.
That’s why one can say that one hectare of forest removes as much carbon dioxide as a power station releases when burning nearly 16 tonnes of coal.
Because this area of Togo is dry, this mineral form of inorganic carbon remains in the soil and doesn’t dissolve.
Improving crop yields
Woody savannah and crops including peanuts, corn, rice, millet, soy and cotton surround the sacred forest I studied in Togo. Crop yields are low because of the low fertility of the soils and a lack of fertilisation.
The farming centre at Tami, has a remnant of only a quarter hectare of the sacred forest. The sacred forest has sharp and straight boundaries, strongly suggesting that its size is controlled by long-term cultivation. The properties of the surrounding soil are completely different.
The farm is developing techniques that put organic matter back into the depleted soils, for example by adding leaf litter as compost. This adds nutrients to the soils that increase food yields. It also mirrors the processes in the sacred forests. It potentially increases carbon sequestration relevant to global climate change policies such as “4 per mil” – an initiative to increase the carbon in agricultural soil by 0.4% or 4 per mil ‰ per year.
Efforts to improve soils are particularly important in areas where these forests are becoming more fragmented because of population growth, expansion of buildings, construction of roads, and erosion of traditional religious beliefs.
Preserving the old-growth forest remnants and restoring degraded farmlands has two benefits: increasing food yields and reducing global CO₂.
Its important that land users, whether in the agricultural and forestry sector or urban gardeners, know of the benefits of conserving organic carbon.
Michele Francis Researcher, Department of Soil Science, Stellenbosch University
Michele Francis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
[VIDEO] The innovations we need to avoid a climate disaster
BILL GATES | TED TALK
The single most important thing for avoiding a climate disaster is cutting carbon pollution from the current 51 billion tons per year to zero, says philanthropist and technologist Bill Gates. Introducing the concept of the “green premium” — the higher price of zero-emission products like electric cars, artificial meat or sustainable aviation fuel — Gates identifies the breakthroughs and investments we need to reduce the cost of clean tech, decarbonize the economy and create a pathway to a clean and prosperous future for all. (This virtual conversation, hosted by TED Global curator Bruno Giussani, was recorded in March 2021.)
Are businesses ready to attract tomorrow’s investors?
Thought leadership article by Joe Keenan, Managing director, BME, a member of the Omnia Group
The world has become rapidly alive to the threats posed by climate change, and mining companies are seeing their shareholders demanding more than just a financial return. Investors – both institutional and private – want their mineral portfolios to speak to their value systems, and these values now centre increasingly on sustainability and shared value for all stakeholders.
Like the mining companies they service, mine suppliers and technology providers should be looking beyond the customer demands of today to remain relevant to the investors of tomorrow.By the same token, others in the mining ecosystem should have similar concerns about their respective futures. The question for our sector might be posed along these lines: How does a blasting and explosives company, for instance, position its brand to be relevant not only to its current customers but to future investors?
To be sure, supply companies receive business from mines because they provide valuable solutions that make mines productive and help keep them viable. That is no longer enough, however. Just as the South African mining sector is subject to the country’s Mining Charter and BEE compliance requirements, so there is a growing expectation globally that mines prioritise environmental, social and governance (ESG) concerns. The once ‘optional’ approach that businesses serve the broader good is now becoming mainstream as more businesses aspire to make a positive impact and leave behind a better world.
In mining, there are already thresholds for suppliers to clear in the field of safety. Many mining companies will not entertain tenders from suppliers whose recordable case rate (RCR) exceeds a certain maximum level. The same often applies to inclusive procurement, where mines expect suppliers to support their efforts to place business with local firms in the vicinity of the mining operation.
While some companies are already driving compelling, integrated sustainability strategies, others are exploring how best to diversify themselves. The emphasis is on going beyond their current offerings and moving further into the sustainability spectrum, with a focus on ESG and ‘green mining’ imperatives. Looking ahead 30 years, for instance, it is clear that fossil fuels will be playing a much-diminished role in energy production – and will be in considerably less demand. European countries are applying their Green Deal, through which the region aims to achieve carbon neutrality by 2050. We are already seeing major mining players extracting themselves entirely from the coal sector – for reasons related partly if not largely to the strategic recalibration of many investors and lenders in the light of climate change. Equally, responsible businesses are increasingly choosing like-minded partners, who share their vision for sustainability.
It is worth remembering that coal is still the planet’s most mined mineral – at almost 8-billion tons in 2019. The anticipated decline in this segment of the market is therefore likely to have a considerable impact on most supply companies to the mining sector; it will certainly have an effect on explosives and blasting providers – although this will depend on regional location and other factors.
The uncertainty in mining’s future might not stop there. Alternatives to coal-fired generation will have to be found, and this is already leading to greater interest in other commodities such as battery raw materials. Some of these will continue to require blasting in a hard rock environment, while others will not – being mineable by free digging. As technology develops, there is even the prospect of energy being generated or stored using materials or substances that are not mined at all; for example, research is being carried out into the electrical storage capacity of certain plant-based material.
The pace of this technological change is being spurred on by tomorrow’s generation, who see in it an epochal opportunity for a more sustainable future. Those who make up this generation are not just the pioneers of a new age but are the investors of the future. It is they who will set the preconditions for investment in coming decades, and it is clear they will prioritise sustainability.
Many – perhaps most – financial institutions have set demanding goals for their investment portfolios, and it is increasingly vital for capital-seeking firms to know what those comprise. They are certainly not ‘tick box’ requirements that can be applied when capital is needed; they are strategic elements that require considerable planning and years of dedicated implementation.
As suppliers to mines, our current commitment to creating value for customers – and to building the technology that will help us to achieve this vital goal – should not blind us to the broader, tectonic shifts underway in society. These promise to drive our economies toward greater sustainability, but they will demand fundamental changes in value systems that many businesses do not yet seem ready to embrace.
By Old Mutual Wealth Investment Strategists Izak Odendaal and Dave Mohr
The world is experiencing a phase of rapid economic expansion as the vaccine-aided reopening of economies is supported by substantial fiscal and monetary support, particularly in the US and other rich nations.
If the 6% global growth forecast of the International Monetary Fund (IMF) is realised, it will be the best year in decades. This partly reflects the rubber band effect: it was stretched too far in 2020 and is now snapping back in the other direction in 2021. However, there is also strong underlying momentum that should carry over into next year. But what lies further ahead?
Chart 1: Past and forecast economic growth, %
Source: International Monetary Fund
Some have argued that we face a new decade of plenty, akin to the Roaring Twenties that followed the last deadly global pandemic a century ago. The theory is that having been through the distress of recession, lockdowns and social distancing, people will want to let loose.
The 1920s, following the horror of World War I and the devastation of the 1918/19 flu epidemic, was famously the era of jazz and glitzy nightclubs. It was the age of Jay Gatsby and the Flappers. It was also the age of rapid technological change. Cars gave freedom of movement, while telephones and radios connected people like never before. The thrilling possibilities of commercial aviation became apparent when Lindbergh crossed the Atlantic in 1927.
Of course, the era also saw an epic stock market rally in the US, partly because new technologies made the stock market accessible to ordinary people for the first time. They jumped in with abandon. President John F Kennedy’s father Joseph famously realised the market was out of control and sold out near the peak after a shoe-shine boy gave him stock tips.
And of course, it all ended in tears eventually. The market crashed in 1929, and as the Great Depression unfolded and spread around the world, it kept falling.
Some of this already feels very contemporary. The urge to escape the confines of lockdowns is real. Technological progress has been rapid, and the pandemic accelerated the pace of adoption. Grannies now use Zoom, while entire businesses have permanently vacated their offices as people work remotely. And once again, the stock market is being democratised, this time through social media forums, free trading apps like Robinhood, and frenzied buying of crypto-assets. Over the last few weeks, Dogecoin, created in 2013 as a joke alternative to Bitcoin, briefly surged to a larger market value than established multinational corporations like Ford.
Blockchain may be overhyped as a world-changing technology, but there have been genuine technological breakthroughs, most notably the development of mRNA vaccines. The decline in the cost of solar and wind energy is providing hope in the battle against climate change, as does the increased sale of electric vehicles. There is also a greater focus on social justice and equality issues, as there was in the years after World War 1, when women were allowed to vote for the first time in several countries (UK in 1918, Sweden and the Netherlands in 1919, the US in 1920 and Ireland in 1922).
But historical parallels only take you so far. There are several issues to consider before concluding that the current boom will last.
Firstly, will households really go on a spending spree? Moody’s estimates that households in the rich world (again, particularly the US) have boosted savings by $5.4-trillion from 2019 levels. How much of this will be spent and over what timeframe? Or will the memory of the pandemic prompt households to maintain healthy rainy day funds?
Part of the answer depends on the distribution of these savings. The more affluent you are, the less likely you are to spend each additional dollar you earn. If you are poor, however, you have to spend every dollar just to stay alive, and saving is a luxury. The rising level of inequality in the developed world is probably one of the reasons behind the slow recovery from the 2008 financial crisis.
The post-crisis, pre-Covid era was characterised by interest rates and inflation persistently lower than expected, while GDP growth in the major countries was below long-term averages.
Chart 2: Real government bond yields, %
Source: Refinitiv Datastream
The overhang of private debt meant there was little appetite to borrow even at record low interest rates, while tightened banking regulations meant that the supply of credit was tight even where there was demand. It was a world of excess capacity, excess savings and sluggish growth, what some termed ‘secular stagnation’ or ‘Japanification’.
Moreover, even before former US president Donald Trump’s trade wars, it appeared that global trade was slowing relative to underlying economic growth. Perhaps the world had reached a natural saturation point beyond which it does not make much sense to stretch supply chains. Post-pandemic, supply chains are increasingly being redirected closer to home with a greater focus on reliability than efficiency.
Developed market outperformance?
The IMF’s forecast is that developed countries will rebound strongly and make up for lost ground relatively quickly. The US is even expected to end up somewhat better than in a no-pandemic scenario. This is of course thanks to its tremendous fiscal firepower and its pushing to the front of the vaccine queue. Developing countries will take longer to recover due to slower vaccine roll-outs and less fiscal support.
This is a reversal of the post-2008 experience when developing countries recovered quickly and strongly, at least initially. And while developing countries will benefit from stronger growth in the rich world, their central banks could be forced to hike interest rates sooner than they would want to if their peers in the developed countries, specifically the US Federal Reserve, decides it’s time to raise rates from near zero levels.
China is expected to grow 8% to 9% this year, but its growth rate will drift back down towards 5% to 6% in the coming years, perhaps even lower. The economy is so large already that such rapid growth rates cannot be sustained without adding more and more debt every year.
The Chinese government specifically wants to move away from reliance on debt-fuelled real estate and infrastructure spending and focus more on services and high-tech manufacturing. It no longer wants to be the world’s factory for cheap junk. It also wants greater reliance on internal demand, as part of President Xi’s ‘dual circulation’ theory. China also faces a unique problem among emerging markets (if we can still call it that) of a declining work force due to its previous one-child policy. All this implies slower growth in the years ahead. Meanwhile the risk of a conflict with the US over Taiwan and other issues remains the biggest geopolitical threat.
Demographics is also at the heart of slower economic growth in the developed countries. Older populations spend less. Labour force growth is now driven almost entirely by immigration, and immigration has become a huge political hot potato.
Policy will be crucial. The Great Depression need not have become ‘Great’. It would have been a run-of-the-mill recession had it not been for a series of policy blunders across the world. Certainly, the Depression was not caused by the stock market collapse.
The post-2008 Great Recession was also characterised by a number of policy mistakes. The European Central Bank (ECB) hiked rates very prematurely in 2011, mistaking a higher oil price for sustained inflation. Another epic mistake was the turn to fiscal austerity in the US, UK and Eurozone around the same time.
By 2016, these mistakes had contributed to a shift to political populism, which led to a new round of policy headwinds (notably Brexit and Trump’s trade battles).
Today policy is extremely loose and supportive. Interest rates are low, central banks are buying bonds, and governments are spending. The IMF reckons there will be $16 trillion in fiscal spending in the wake of the pandemic, mostly borrowed. This is a giant experiment and we don’t know yet how it will play out. The key metric is not debt-to-GDP ratios, but debt service ratios, the portion of national income that is spent on interest payments.
Apart from expansionary countercyclical fiscal policy (providing money to fill the hole left by Covid), there is also a renewed sense that governments can and should lead the way to “build back better”. The US Biden administration has been at the forefront with an ambitious social, infrastructure and climate change agenda. If implemented and replicated by other countries, it could boost global expansion and wellbeing.
Finally, productivity growth is key. Productivity is what allows growth without inflation. Growth without productivity means the prices of resources (workers, raw materials, and equipment) are pushed up. Productivity means doing more with less inputs.
It remains a puzzle why all the technological progress of the past few years has not really boosted productivity growth, which is measured as output per worker, and which has only grown by about 1% per year in the rich world over the past decade, half the previous decade.
There are several plausible theories. One is that companies, faced with uncertainty and sluggish demand, have not invested enough in new technology and equipment. Another is simply that it can take time to work out how best to implement new technology to make a difference. For instance, the personal computer is a product of the 1980s, but only in the 1990s did it really change the nature of work. Commercial aviation, as mentioned earlier, only became widespread several decades after the Wright Brothers first took off at Kitty Hawk in 1903.
Chart 3: Productivity growth for the developed countries, %
Source: Refinitiv Datastream
To summarise, a Roaring Twenties scenario would require sustained productivity growth, policy tailwinds (or at least the absence of headwinds) and rising confidence. One would also expect somewhat higher, but not runaway, inflation which in turn implies higher interest rates.
From an investment point of view, a Roaring Twenties scenario sounds great for equity investors locally and globally as growth boosts corporate revenues, and productivity gains keep cost pressures in check and margins healthy.
But as in the 1920s, investors will need to be careful to avoid bubbles and be wary of using debt to gear up returns. This scenario sounds bad for bond investors. Even modestly higher inflation will erode developed market bond and cash returns given how low yields still are. South African bonds would be at some risk from upward pressure on global yields, but high starting yields provide a cushion, while stronger economic growth should allow the government to reduce borrowing.
The opposite scenario of a continuation of the secular stagnation symptoms – let’s call it the Meowing Twenties – should place persistent downward pressure on bond yields as excess savings look for a safe home. The 10-year US Treasury at 1.6% currently might be a good buy. It certainly was a good buy when the Japanese yield was at that level 15 years ago.
How this impacts the equity market is not straightforward. The previous decade showed how low bond yields benefited equities, but only those companies with an in-built growth momentum, specifically large technology platform shares in the US and China. Outside the US equity returns were nothing to write home about. Certainly South Africans should prefer the Roaring to Meowing Twenties. Another decade of sluggish growth should push government debt levels into even more worryingly high levels, though it should also continue to grind both inflation and short-term interest rates lower.
These are all big questions that lack clear answers. While some of these trends seem distant compared to the closer and noisier local politics, they ultimately matter more for longer-term investment returns. That said, one thing to remember is that equity markets are always changing anyway. The ten biggest listed companies in the world today are all technology companies (broadly speaking) apart from JPMorgan, the bank.
This is very different to the era before the financial crisis (when it was commodities and banks that dominated), or the 1980s (Japanese stocks), or the 1970s (industrials). Going all the way back to the early 1900s, the railway industry was by far the biggest global sector. Locally, our market is now also dominated by tech (Naspers), while gold mining is small. The top performing economic sectors tend to naturally find their way into equity indices, and it has usually paid to have broad long-term exposure.
While it is important to ponder how the world will change (or not) over the next few years, we need to accept that the future is inherently unpredictable. However, this should not put investors who need long-term growth off from investing in equities. It is quite possible that we will see elements of both Roaring and Meowing in the years ahead, and as always it will be diversification that ensures portfolios can benefit either way.