Fri. Jan 28th, 2022


© Reuters. SHEET PHOTO: Takeaway cardboard food boxes are seen on a table at chef Jordan Bailey’s Michelin-starred Aimsir restaurant during preparations to reopen coronavirus disease restrictions (COVID-19) in Celbridge, Ireland , June 2, 2021.


By Sujata Rao and Simon Jessop

LONDON (Reuters) – From container ships to cardboard, stricter environmental regulations are causing shortages and rising prices as the “greenflation” takes control, adding a new twist to corporate valuations.

For all the transitional messages of central bank inflation, double- or triple-digit cost increases have become commonplace in corporate balance sheets, although the green variety has not yet appeared in bond markets, the usual early warning system.

While higher costs are partly reduced by pandemic-related supply failures, fund managers say a powerful impetus is emanating from new strict rules to guide the world’s transition to a greener future.

And these may outweigh the COVID-19 inflation narrative.

To reduce greenhouse gas emissions, the European Union will raise the cost of carbon emissions for transportation and factories, abandon sales of gasoline-powered cars, and levy carbon taxes on trading partners.

Aluminum, electricity and fertilizers are among the target sectors, with others such as aviation in the EU’s sights.

Investors largely agree that greenflation is a necessary risk, as with the United Nations saying global warming is spiraling out of control, the alternative of frequent floods, droughts and forest fires is worse.

The question facing fund managers is which companies will see profit success, which can pass on costs, and which will thrive.

For Peter Rutter, head of equities at Royal London Asset Management, the solution lies in modeling how, for example, carbon dynamics can affect cash flow, revenue and stock prices.

“We are big believers in greenflation. There are scenarios that take assets out of use, such as cars that can no longer be driven or ships that are not allowed access to certain ports.”

“The other element is the injection of additional costs. If companies can pass on the costs, it’s inflationary. If not, it adds inflation to production and hurts margins,” Rutter added.

The company’s profits reflect higher input costs. But it is difficult to say which ones are related to the environment.

American distributor Home Depot (NYSE 🙂 recorded a gross margin of 35 basis points in the first quarter after a triple in timber prices, offsetting a 31% increase in sales at the same store.

And the packaged food company Conagra warned that raw material costs and packaging were hurting profits, a headwind that would not relax until the end of 2022.

BofA analysts accounted for references to “inflation” during last quarter’s profit calls and estimate that they rose 1000% year-on-year for companies and 400% for those in European indices.

Graph: Mention inflation


In shipbuilding, for example, orders have fallen, which officials attribute in part to uncertainty about what technology to adopt for alternative fuels.

New ships take up to three years to deliver and typically operate for more than 20 years, at which time high-emission ships may be unviable. And if shipping is added to carbon markets, homeowners have to buy permits or risk port bans.

Chart: The proportion of dry bulk ship orders and fleet size has decreased

This can support already high transportation costs.

Similarly, stricter forest regulations and the closure of polluting Chinese smelters are affecting wood and metal prices, PIMCO fund manager Geraldine Sundstrom noted.

“It takes time to grow a tree,” Sundstrom said. “In an ecological and digital world, you have to position yourself in the right place, where there are barriers to entry and therefore price power.”

Sundstrom believes that sectors such as the integrated forestry sector and maritime transport could enjoy significant gains in prices “as markets continue to bet on reversing prices”.

There will also be losers. Global stocks could suffer a 20% drop if carbon prices (the price companies pay for polluting) rise by $ 75 per tonne, according to a recent study by Kempen Capital Management, which manages 86 billion euros.

Within sectors, carbon-intensive companies will be lost as border carbon taxes arrive, BofA says.

Aluminum-dependent aluminum producers Norsk Hydro (OTC :), Rusal and Rio Tinto (NYSE 🙂 with a carbon footprint of four tonnes of carbon dioxide per tonne of metal, are better placed than smelters Chinese with 16 tons of emissions, he added.


So does that mean higher inflation for the economy as a whole?

Greenflation will not last forever, as the effects on the price of carbon will spread over the years, while the adoption of renewable sources should gradually reduce energy generation costs.

However, the “deflationary rotation” will take time, Morgan Stanley (NYSE 🙂 analysts said.

Carbon emissions prices have doubled this year, with Morgan Stanley estimating that it raised eurozone retail electricity prices by 8% in June and added 23 points basic to inflation. A rise to 100 euros will increase retail energy prices by 12%, he says.

And clean energy faces its own costs, as electrical equipment, wind turbines and fuel cells are exposed to higher prices for metals and shipments.

Michael Herzum, head of strategy at the German Investment Union, said price jumps are inevitable, as carbon will be priced high enough to spur change.

While the effect should diminish over time, Herzum said the green transformation will reinforce “a 40-year period of disinflation that is over.”

Chart: rising carbon price

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