Piet Viljoen, one of the top-performing asset managers in South Africa, has identified five companies that may benefit from the energy transition in South Africa – Kumba, Afrimat, ArcelorMittal, Glencore, and Thungela.
The way out of South Africa’s energy crisis largely depends on the government and private sector’s mass deployment of renewable energy capacity.
South Africa has been forced down this route. More developed economies are undergoing an energy transition to renewables voluntarily.
This global transition is coupled with the rise of Environmental, Social, and Governance (ESG) based investing, which has limited investment in commodity production.
This provides the basis of Viljoen’s contrarian investing thesis for the renewable transition in South Africa and globally.
Viljoen noted that renewable energy production is highly resource-intensive regarding the commodities needed to build solar panels, wind turbines, and storage facilities.
For instance, for the same level of energy production as a coal power plant, a wind farm requires 3 to 4 times more steel.
ESG investing has limited the expansion of commodity supply, resulting in a supply-demand imbalance and higher commodity prices. Viljoen estimates it will take 10 to 15 years to rectify this imbalance.
For Viljoen, these factors will result in a long-term uptrend for resource companies as commodity prices will remain higher for longer.
Viljoen pointed to the returns of Thungela and Glencore over the last 12 to 24 months as evidence.
These two companies are among the world’s largest coal producers and have benefitted from higher coal prices due to the energy crisis in Europe, which required coal-fired power plants to be turned on.
Coal remains a viable source of cheap energy for developed and developing countries. It will likely remain a part of the energy mix for decades.
These companies will benefit from a slowing transition to renewables while other commodity producers will benefit from a change to renewable energy.
Glencore is perfectly positioned as it is also a major producer of copper, cobalt, and nickel – all vital for the renewable transition.
Steel and concrete will benefit from the requisite mass construction of infrastructure for electricity generation and the reconfiguration of electricity grids.
South Africa’s grid, as an example, will need to be reconfigured to transfer electricity from renewable sources in the Northern Cape, Western Cape, and Eastern Cape rather than from the coal heartlands in Mpumalanga.
Companies like Arcelor Mittal SA, South Africa’s largest steel producer, will benefit from this infrastructure rollout.
However, Viljoen cautions that Arcelor Mittal SA is a relatively small steel producer globally, so it may not benefit from the energy transition to a substantial degree.
South Africans have access to some of the largest iron ore producers globally on the JSE, such as Kumba and Afrimat, which will benefit from the increased demand for steel in building renewable infrastructure.
These few companies will likely benefit from South Africa’s forced energy transition and the global renewable transition, with commodity supply remaining constrained over the medium term.
Viljoen also encouraged exposure to South African financial services companies, which are attractively valued and will have to finance large renewable projects.