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ESG, anyone? Coal and oil prices soaring as China squeeze and supply chain chaos hits everything

Published: 11:52 30 Sep 2021 BST

Royal Dutch Shell PLC -

There’s Brexit, there’s inflation, there’s the coronavirus, and there’s all manner of uncertainties at large in the world today. But the one thing we’ve all come to rely on is that whatever happens climate change is going to destroy it all anyway.

The science isn’t quite settled on this, no matter what they tell you, although the arguments are as  powerful as they are traditional - man’s bad behaviour is eventually going to bring about his own downfall. Sound familiar? – try cross-referencing with the stories of Noah’s Flood or Sodom and Gomorrah or any practitioner of wacky religion from John Calvin to Jim Jones or David Koresh.

We are all doomed.

But what if we’re not.

What if actually we’re just tying ourselves in knots over the same apocalyptic impulses that have existed in human culture for thousands of years.

In Britain, you can’t get gasoline at the moment, although what you can’t really get is lorry drivers. In China, you can’t get coal, although what you can’t really get is the Australian government to concede that Covid-19 didn’t really escape from a lab in Wuhan after all.

Are these problems real? Or are they just a performance, designed to keep the audience away from deeper questions of meaning and power?

Either way, they’re having a significant effect on markets.

The “get woke, go broke” crowd have some crowing to do, let’s admit it. Oil is rapidly ushering in the feiry end of days, and yet buyers can’t get enough of it. Oil is at a three year high, and the share prices of BP Group and Royal Dutch Shell PLC (LSE:RDSB) are at 12-month highs.

Meanwhile thermal coal, the worst type of coal from an environmental perspective, is on a tear, up from just over US$100 per tonne in January this year, to over US$170 per tonne now.

The reason for this is simple enough: China is simulteneously courting the wrath and the praise of the environmentalists by continuing with a massive – the world’s largest – programme of coal-fired power construction, whilst simultaneously trying to limit coal consumption in the name of clean air and certain ill-defined emissions reduction targets it’s pushed out to 2050.

What the Lord Xi Jinping gives with one hand, he takes away with the other.

But the consequences are notable. Add in the moratorium on supply from Australia, and all of a sudden you’ve got power shortages in China of the kind also seen recently in South Africa. And you’ve also got short sharp shocks to all sorts of major infrastructure projects, since coal is essential for the smelting of iron ore and the production of steel. Among the likely outcomes are serious cost blow-outs and cancelled projects.

The knock-on effects are being felt all the way around the world, as commodities traders scramble for positions in coal and oil, and sell down the major mining companies, as it now looks like demand for iron ore will be severely interrupted. This week, for example, Liberum decided that in its commodities world Rio Tinto PLC (LSE:RIO) and BHP Group were among its least favourite investments. Glencore, on the other hand, which from an ESG point of view looks no different, or possibly even worse than Liberum’s new outcasts, fares better.

The market, at least while the supply chain and commodity chaos is here, seems to agree. Glencore’s shares are at a 12-month high. Rio’s are closer to their 12 month lows, while BHP’s performance can probably best be described as middle of the road.

So, could it be that despite all the smoke and mirrors thrown up by ESG, it’s still fundamentals that count after all? Rash to bet against the long-term combined power of big government and widespread political feeling.

But for short to medium-term traders, as environmentalists drive sentiment through the floor, there sure are some bargains to be had.

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