Market Strategist
Summary: Could the focus on energy and renewable adoption change the entire investment sentiment in Asia?
Asia, including emerging Asia, is at the forefront of the energy crisis. The most compelling case of investment in emerging markets historically has come from the demographic trends and increasing aggregate demand amid rapid urbanisation and a growing middle class. However, energy supplies are likely to remain short for the foreseeable future due to decades of underinvestment, Russia’s war tactics, and increasing energy security issues in Europe and elsewhere.
This means the future will bring a wave of investment in securing energy supplies, deploying energy infrastructure, adopting new energy sources to meet power demand, and ensuring energy security and a broad-based fuel reliance. This won’t come without some short-term pain, including blackouts, caps on industrial use and rising subsidy bills, as well as a possibility of social and political unrest in some of the weaker Asian markets. We got a flavour of the crisis in Sri Lanka earlier this year, and Pakistan and Bangladesh also remain exposed to such risks.
Liquified Natural Gas (LNG) has been popular in Asia as a bridging solution between the jump from coal and other fossil fuels to renewable sources of energy. LNG has also been one of the most convenient replacements for domestic gas, supplies of which are fast declining in countries like the Philippines, Bangladesh and Thailand. However, Europe is now competing directly with Asia to secure LNG supplies as its gas supply from Russia dries up. It is expected that Europe’s LNG demand could increase by 25 million tonnes (Mt) this year. As such, LNG cargoes have started to be diverted away from Japan and Asia in general in a hunt for better price points in Europe. This means that parts of Asia will lose their LNG supplies not just for this year, but for years to come as Europe builds its other sources of energy. Those that can afford it will have to pay a much larger fee to maintain a steady supply of LNG.
Japan is in no way a stranger to energy crises. A catastrophic earthquake and tsunami triggered a meltdown of the Fukushima Daiichi nuclear plant in 2011, followed by a suspension of nuclear power over the last decade. Since then, Japan has focused on energy saving at the business and household level, without the need for substantial government interventions.
In recent months, a scorching heatwave and surging oil and gas prices have again brought Japan’s energy security under the scanner as electricity prices rose to a record high. Japan, being the fifth-largest oil consumer and the sixth-largest gas consumer globally, is heavily dependent on energy imports. Almost 90 percent of Japan’s domestic energy consumption comes from imported oil and gas.
Russia’s shock nationalisation of the Sakhalin 2 LNG and oil project, coupled with the Japanese yen at its lowest level for over two decades, have added to Japan’s energy pains. Japan’s excessive reliance on LNG has also come back to haunt it with supplies getting diverted to Europe. The only viable solution for Japan in the near term will be further demand destruction at the individual and business level. The government may need to step in to institute consumption limits for the bigger energy users, and it remains certain that consumers are about to feel the pinch. This could, however, mean that some tough decisions, such as those on nuclear adoption, could become relatively easy.
Japan’s Prime Minister Kishida has pushed forward with the adoption of nuclear technology to address the demand-supply gap in the power market. His government has taken charge to ensure the continued operation of 10 nuclear plants that have been restarted, and is further pushing to restart another 7 reactors. This is a huge signal to other Asian countries and the world that nuclear energy can not only help to reduce reliance on fossil fuels, but it achieves this in the most green way possible by reducing carbon emissions and increasing energy security. This provides a compelling investment opportunity in power companies with an increasing share of output coming from nuclear, such as Kansai Electric Power (9503). There will potentially be some hurdles in the way for Japan to pursue the nuclear path, and some reliance on coal will likely be explored as well. Japan has a clear focus on the “net” in the net-zero agenda, and is pushing the carbon capture, usage and storage (CCUS) technologies that can enable it to keep burning some fossil fuels in hard-to-decarbonise sectors by offsetting or capturing/utilising emissions from power plants and industrial processes, and even extracting CO2 directly from the atmosphere. This brings potential opportunities in CCUS technologies, but also suggests that Japan will continue to use fossil fuels despite its net-zero push.
Coal-fired plants have been one of the easiest fall-back options for many emerging Asian countries, due to the scale of demand as well as the ease of availability of the fossil fuel and its related infrastructure in the region. For countries with low-cost domestic coal supplies, the case has been even more compelling, and coal-fired output has ramped up recently in China, India, Indonesia and Vietnam.
More alternate energy sources are also being explored. Singapore, for instance, has exerted efforts to unearth its geothermal potential to diversify its energy sources. Indonesia, the Philippines and New Zealand also have significant untapped geothermal potential which could be explored further as the energy crisis reigns. Hydrogen and hydropower also remain a key focus in the region, with South Korea being the world leader in the hydrogen economy and others like China, Japan and Malaysia also adopting hydrogen push policies. Global demand for hydrogen based on existing government pledges is expected to reach around 250 Mt per annum by 2050. Some of the ETFs that provide exposure to the hydrogen push include VanEck Hydrogen Economy UCITS (HDR0:xetr), Global X Hydrogen (HYDR:xnas) and Direxion Hydrogen (HJEN:arcx).
Asia’s nuclear adoption is also expected to take a step up in the current crisis. In addition to Japan, countries like India and China have also shown increasing acceptance of nuclear technology to meet the growing energy demand. India plans to triple its number of nuclear power plants to 72 in total, while China has proposed the construction of 168 new reactors in addition to 18 being built and 37 being planned, which would amount to an increase of 337 percent. Overall, 35 reactors around Asia are already in construction, with Europe coming in second with 15 plants, according to data from World Nuclear Association.
In summary, the future lies in a more balanced distribution of energy sources. For Asian economies with a lack of domestic fuel supplies, energy self-sufficiency can only come from a bigger and faster shift to renewables in the medium term. Those that have domestic supplies may however find it harder to trust the volatile renewable sources and a more pragmatic approach may be warranted.
India’s heavy reliance on oil, with about 80 percent of its demand being met by imports, made it vulnerable to the energy crisis early on. What saved India from a balance of payments crisis was its continued oil imports from Russia, at an undisclosed discounted price paid in Russian roubles. This is just a reflection of the course that other emerging markets could take as well, as they get immersed knee-deep in energy scarcity issues and are unable to find any reliable short-term solutions to sustain their economies. The Sri Lanka crisis has already raised alarm bells for many frontier economies. There have been reports recently that Myanmar has also started buying Russian oil products and is ready to pay for deliveries in roubles. Similarly, Moscow may continue to find buyers in smaller nations that have been hard hit by inflation and are running out of fuel supplies.
If more and more countries shift to similar trade arrangements with Russia for their energy and/or food/fertiliser imports, that could mean a significant shift away from dollar-based trade finance in the region. This will have consequences beyond the global energy markets, with some countries potentially faced with the tough choice of taking sides as deglobalisation forces become stronger.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.