ColinTwiggs, Author at the patient investor

April 7, 2017

Record amount of renewable energy capacity added in 2016 | DW.COM

Global renewable energy capacity jumped eight percent last year despite a 23 percent drop in investment. Falling renewable energy prices are driving a build-up of capacity.

The world added a record amount of renewable energy in 2016 despite a sharp drop in investment, the UN said Thursday, largely due to falling costs of clean energy.

New renewable energy, excluding large hydro projects, added 138.5 gigawatts of power in 2016, up eight percent from the previous year. The new capacity came despite investment falling to $241.6 billion (227 billion euro), 23 percent lower than the previous year and the lowest since 2013.

….Not all the drop in investment was due to reduced costs, with China, Japan and some emerging markets cutting renewable investments. China’s investment in renewables dropped 32 percent to $78.3 billion, the first time in a decade it bucked a rising trend. Japan’s investment tumbled 56 percent.

What is encouraging is the 29% reduction in cost per KWh of renewable energy.

Levelized Cost
A 2014 study by Lazard, an international financial advisory and asset management firm, shows onshore wind has the lowest average levelized cost at $59 per megawatt-hour, and utility-scale photovoltaic plants weren’t far behind at $79. By comparison, the lowest cost conventional technologies were gas combined cycle technologies, averaging $74 per megawatt-hour, and coal plants, averaging $109. These numbers are the average of low- and high-end estimates….

Levelized Energy Costs

Wind and solar costs falling
The levelized cost of some wind and solar technologies has plummeted in recent years. The graphic below shows that the average cost of onshore wind has fallen from $135 per megawatt-hour in 2009 to $59 in 2014. That’s a 56 percent drop in five years. The cost of utility-scale photovoltaic technology has plunged from $359 per megawatt-hour in 2009 to $79 in 2014, a 78 percent decline. [source: Energy Innovation]

Lazard: Solar & Wind Energy Costs

The cost of large-scale solar continues to fall rapidly. In August 2016, Chile announced a new record low contract price to provide solar power for $29.10 per megawatt-hour (MWh). In September 2016, Abu Dhabi announced a new record breaking bid price, promising to provide solar power for $24.2 per megawatt-hour (MWh). [source: Wikipedia]

Wind prices are also falling. In 2016 the Norwegian Wind Energy Association (NORWEA) estimated the LCoE of a typical Norwegian wind farm at 44 €/MWh, assuming a weighted average cost of capital of 8% and an annual 3,500 full load hours, i.e. a capacity factor of 40%. NORWEA went on to estimate the LCoE of the 1 GW Fosen Vind onshore wind farm which is expected to be operational by 2020 to be as low as 35 €/MWh to 40 €/MWh. Offshore wind prices are also falling. In November 2016, Vattenfall won a tender to develop the Kriegers Flak windpark in the Baltic Sea for 49,9 €/MWh. [source: Wikipedia]

The IEA says “The share of renewable energy in total final energy consumption climbed to 18.3%, continuing the slight acceleration of trends evident since 2010. However, progress is nowhere near fast enough to double its share to 36% in 2030. As highlighted in IEA’s World Energy Outlook 2016, the challenge is to increase reliance on renewable energy in the heat and transport sectors, which account for the bulk of global energy consumption.”

Source: UN: Record amount of renewable energy capacity added in 2016 | News | DW.COM | 07.04.2017

April 6, 2017

The inconvenient truth behind the rise in energy prices

From Brian Robins:

“The inconvenient truth is that the increasingly high prices for increasingly unreliable electricity are a direct consequence of the increasingly high utilisation of renewable energy required by government regulation,” Gary Banks, a former head of the Productivity Commission, said in a speech to Infrastructure Partnership Australia on Thursday night.

…”Energy markets are admittedly complicated things. However the logic is unassailable that if a cheap and reliable product is penalised, while expensive and less reliable substitutes are subsidised, the latter will inevitably displace the former. No amount of sophistry, wishful thinking or political denial can change that basic economic reality.”

“Changing the mix of energy use away from low-cost but emissions-heavy fossil fuels has of course been the whole point,” he said. “The resulting costs and difficulties have been greatly compounded, however, by governments choosing a policy path that is essentially anti-market, one violating basic principles of demand and supply.”

Source: The inconvenient truth behind the rise in energy prices

April 6, 2017

Robots Take Over | Susanna Koelblin | LinkedIn

From Susanna Koelblin:

First large scale shoe robot factory unveiled: Adidas will use machines in Germany instead of humans in Asia to make shoes

Adidas, the German maker of sportswear, has announced it will start marketing its first series of shoes manufactured by robots in Germany from 2017. More than 20 years after Adidas ceased production activities in Germany and moved them to Asia, Adidas unveiled the group’s new prototype “Speedfactory” in Germany. As of this year, the factory will begin large-scale production. What’s more, Adidas will also open a second Speedfactory in the U.S. in 2017, followed by more in Western Europe. According to the company, the German and American plants will in the “mid-term” each scale up to producing half a million pair of shoes per year.

Does this pose a threat to Adidas’s traditional manufacturing base in China, Indonesia and Vietnam? After all, labor in the region is becoming less cheap these days, and manufacturers are increasingly turning to robots. The current model in the apparel industry is very much based on sourcing products from countries where consumers are typically not based. In the longer term Adidas could even produce the shirts of Germany’s national football team in its home country. The shoes made in Germany would sell at a similar price to those produced in Asia, where Adidas employs around one million workers. Arch-rival Nike is also developing its robot-operated factory.

This development in the shoe area is just the beginning and will be leveraged to the apparel industry as well….

Robot factories will not restore former employment levels, with operations run by a skeleton staff. And low employment leads to low consumption. But new factories will require intensive capital investment. This may portend increased demand for capital in the future. With current high debt levels threatening the stability of the financial system, equity investors may be in short supply.

Source: Robots Take Over – The Apparel Production | Susanna Koelblin | Pulse | LinkedIn

April 5, 2017

RBA Monetary Policy: What could go wrong?

Statement by Philip Lowe, Governor
Monetary Policy Decision
4 April 2017

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have tightened in many countries. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

The Australian economy is continuing its transition following the end of the mining investment boom. Recent data are consistent with ongoing moderate growth. Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year. At the same time, some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.

The outlook continues to be supported by the low level of interest rates. Lenders have recently announced increases in mortgage rates, particularly those paid by investors. Financial institutions remain in a good position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Inflation remains quite low. Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent. The rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued.

Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades.

Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Inflation low.
Interest rates low.
Income growth low.
Labour market softening.
Sydney house prices up 18.9% (YOY).
Melbourne up 15.9%.
China teeters as PBOC attempts to slow rapid credit expansion.

What could go wrong?

Source: Statement by Philip Lowe, Governor: Monetary Policy Decision | Media Releases | RBA

April 4, 2017

APRA: Wayne Byres warns banks need more capital

From APRA chairman Wayne Byres’ keynote address to the AFR Banking & Wealth Summit 2017, Sydney:

Haven’t we done enough already?

The third question is: haven’t we done enough already?

The banking system certainly has higher capital adequacy ratios than it used to. But overall leverage has not materially declined. The proportion of equity that is funding banking system assets has improved only modestly, from a touch under 6 per cent a decade ago to just on 6½ per cent at the end of 2016.

The difference between improved risk-based measures of capital adequacy, and the more limited improvement in non-risk based measures of leverage (Chart 6), is driven to a significant degree by changes in asset composition. In particular, it reflects the increasing concentration of the banking system in mortgage lending (which benefits from lower risk weights – Chart 7).

It implies the system has de-risked more than deleveraged. But that assessment is itself premised on a critical assumption: that a high and increasing concentration in mortgages is generating a lower risk banking system. In the current environment, it is certainly an assumption that deserves a bit more scrutiny. While it might be a reasonable proposition most of the time, we need to be wary of the fallacy of composition when concentrations grow.

….The case for the Australian banking system to be seen as unquestionably strong remains as valid today as it did when the FSI recommended it in 2014. And, as much as we would like international policy deliberations to be complete, we do not think it right to defer a decision on this issue any longer…..

Bank leverage has barely improved despite substantial increases in capital ratios as banks have increasingly concentrated their exposure in residential mortgages which have lower risk-weighting. Chart 7 above shows how the average risk-weighting of bank assets has declined over the last decade.

Neel Kashkari, president of the Minneapolis Fed, believes that banks need to hold far higher capital in order to avoid future bailouts. His proposal:

….force banks to finance themselves with capital totaling 23.5% of their risk-weighted assets, or 15% of their balance-sheets without adjusting for risk (the “leverage ratio”). This, says Mr Kashkari, would be enough to guard the financial system against a shock striking many reasonably-sized banks at once. Any bank deemed too big to fail would need a still bigger buffer, eventually reaching an eye-watering 38% of risk-weighted assets….

It’s widely accepted that Australia’s big four banks are too-big-to-fail. If that is the case, applying Kashkari’s measure would require them to increase bank capital by 200%.

Even without the too-big-to fail buffer, the major banks would require a 100% increase in bank capital to meet the 23.5% capital requirement for risk-weighted assets. And a 150% increase to match the 15% minimum without risk weighting.

The question needs to be asked: is APRA doing enough to protect Australians from a financial crisis? To me the answer is a clear NO.

Source: Pages – Fortis Fortuna Adiuvat: Fortune Favours The Strong

Hat tip to Macrobusiness.

April 4, 2017

Is the Donald long gold?

Don’t know if he is long, but Donald Trump is doing his best to drive up demand for gold.

From the FT overnight:

Donald Trump has warned that the US will take unilateral action to eliminate the nuclear threat from North Korea unless China increases pressure on the regime in Pyongyang.

In an interview with the Financial Times, the US president said he would discuss the growing threat from Kim Jong Un’s nuclear programme with Xi Jinping when he hosts the Chinese president at his Florida resort this week, in their first meeting. “China has great influence over North Korea. And China will either decide to help us with North Korea, or they won’t,” Mr Trump said in the Oval Office.

“If they do, that will be very good for China, and if they don’t, it won’t be good for anyone.”

But he made clear that he would deal with North Korea with or without China’s help. Asked if he would consider a “grand bargain” — where China pressures Pyongyang in exchange for a guarantee that the US would later remove troops from the Korean peninsula — Mr Trump said:

“Well if China is not going to solve North Korea, we will. That is all I am telling you.”

Nothing like the threat of nuclear war to drive up the price of portable assets. Not that it would do much good if you are on the receiving end.

Spot Gold broke resistance at $1250 an ounce. Follow-through above $1260 is likely and would signal an advance to $1300.

Spot Gold

Theresa May had a calmer, less belligerent approach: “….encourage China to look at this issue of North Korea and play a more significant role in terms of North Korea … I think that’s where our attention should focus.”

April 4, 2017

Sorry folks, this ain’t no property bubble

I have been predicting the collapse of the Australian property bubble, so feel obliged to also present the opposite view. Nothing like confirmation bias to screw up a good investment strategy.

Here Jessica Irvine argues that the property bubble will not burst:

Believe me, no one is keener than me to see a property bubble burst.

But sadly – for would-be buyers, at least – I just don’t see it happening.

Sure, there are risks.

If it turns out that banks have been lending to people who really can’t afford it, then we have a problem when interest rates start to rise.

Experts have been calling the end of the property market for years. But banks insist they stress test customers for a 2-percentage-point rise in interest rates and require “interest-only” borrowers to prove they could afford to repay principal too, if required.

More worrying is the mortgage broking channel, where a recent ASIC investigation found most of the high loan-to-value loans are written. If there is a weakness in the housing market, it’ll be in this area of lending standards and so called “macroprudential” policies when interest rates start to rise. The recent clamping down on investor loans is welcome.

But ultimately, the defining thing about bubbles is that they inevitably must pop.

But where is the trigger for a widespread home price collapse?

In a world of low inflation and growth, the Reserve Bank is likely to raise interest rates very gently, cushioning households.

Widespread job losses would be a trigger, but there is no talk of that. With record low wages growth, labour is hardly expensive at the moment.

Bubble proponents point to very high household debt levels relative to incomes. But the structural lowering of interest rates in the late 1990s and again after the global financial crisis has increased the amount of debt households can afford to service from a given income.

Lower rates have also helped many households build significant “buffers” against future rate increases, in offset accounts and other forms of saving.

Bubbles form when asset prices disconnect completely with market fundamentals.

But there are very good reasons to expect housing to be so expensive.

Forget the Cayman Islands, housing – owner occupied and investment housing – offers the best tax shelter around, from negative gearing and the capital gains tax discount on investment housing to the complete exemption of the family home from capital gains tax AND from the pension asset test.

Meanwhile, rapid population growth has been met by sluggish increases in housing supply. Incompetent state governments have created a premium for inner-city housing, where buyers can avoid paying the indirect costs of long commutes.

In the aftermath of World War II, home ownership rates skyrocketed as governments focused on supply.

But since then, governments have instead implemented policies that boost only the demand side of the equation, with tax concessions and cash bonuses for buyers that only increase prices.

Absent any trigger for widespread forced property sales, home owners will always respond to sluggish market conditions by sitting on their properties for longer. Lower volumes provide a cushion against falling prices.

In such a market, the best a first-time buyer can hope for is that future price gains might come back into line with income growth.

Indeed, that’s exactly what happened after the early 2000s property boom when Sydney prices stagnated for almost a decade.

It’s less exciting, but more likely.

Jessica makes a good point about offset accounts which may cause real household debt to be overstated. This warrants further investigation.

But she seems too complacent about market fundamentals:

an oversupply of apartments;
negative gearing and capital gains tax advantages that could be removed by the stroke of a pen (or a tick on a ballot paper); and
prospective sharp cuts to immigration (again dictated by the ballot box)

Interest rate rises seem unlikely in the near future as inflationary pressures are fading. But I doubt that new homebuyers could afford a 2 percent rise in interest rates, that would amount to an almost 40% increase in monthly repayments for some. Even if they survive, repayments will take a big bite taken out of other household consumption and hurt the entire economy.

Also, the RBA may plan to increase rates gradually, to cushion the effect on homeowners, but Mr Market could have other ideas. And if you think central banks act autonomously from markets, think again.

Source: Sorry folks, this ain’t no property bubble

April 3, 2017

Could Scotland go their own way?

Interesting view from Neils Jensen at Absolute Return Partners in the UK:

Nicola Sturgeon has recently called for a second Scottish independence referendum, this time using Brexit as the excuse. She cannot keep calling for a referendum every time she doesn’t get the outcome she so badly wants, but she has a point. Brexit does indeed change things quite fundamentally.

The point Sturgeon has chosen to disregard, or at least has chosen not to bring up in the public domain, is that Scotland can hardly afford the independence that she so desperately seeks. Scotland runs a fiscal deficit of about 9.5% of GDP at present and only survives because of grants from London. Yet, she has promised a significant increase in welfare spending in an independent Scotland. Her case was a great deal stronger when oil prices hovered around $120-130 per barrel. With oil prices around $50, she has no case at all…..

Source: The truth about Brexit – The Absolute Return Letter

April 2, 2017

Politicians addicted to the polls

From Ross Gittins:

I realised the Australian government was fast approaching peak fake when I read Laura Tingle of the Financial Review’s revelation that Malcolm Turnbull’s Snowy 2.0 announcement was timed to favourably influence the imminent fortnightly Newspoll result.

When our leaders progress from being mesmerised by opinion polls to trying to game them, that’s when we know the country’s in deep, deep trouble.

It’s long been clear that, acting on their belief that “the perception is the reality”, the political class – Labor and Coalition – has focused less on attempting to fix problems and more on being seen to be fixing them.

But trying to game the political polls takes faking it to a new level: being seen to be seen to be trying to fix things…..

The only way to prevent this short-term focus is to change the system. In a winner takes all political system, who can blame the actors for focusing on the next election instead of the long-term interests of the country.

I have long advocated proportionate representation in government along the lines of the Swiss system. So politicians can quit the grandstanding and get on with doing their job. The Swiss enjoy one of the best run economies in the world, simply because their leaders take a fifty-year view rather than the four- or five-year election cycle.

In the Swiss system, a central committee is democratically elected, based on proportional representation. All parties are represented on the 7-member Federal Council and decision-making is collective. Council members serve one year terms as the largely-ceremonial head of state. The strength of the system is its stability, with only one change to the composition of the 7-member Council over the last 50 years. This enables members to focus on long-term goals rather than on short-term politics — the reason why the Swiss economy is one of the most stable and successful, ranked 8th in the world in terms of GDP per capita according to the IMF.

Powers of the central committee are restrained by a vibrant direct democracy where citizens regularly vote on national referendums. The ability of voters to overturn political decisions maintains a strong check on the central committee during their elected term and also curbs the influence of special interest groups, another abscess on butt of many democracies.

Source: Politicians addicted to the appearance of economic success

April 1, 2017

3 Headwinds facing the ASX 200

The ASX 200 broke through stubborn resistance at 5800 but is struggling to reach 6000.

ASX 200

There are three headwinds that make me believe that the index will struggle to break 6000:

Shuttering of the motor industry

The last vehicles will roll off production lines in October this year. A 2016 study by Valadkhani & Smyth estimates the number of direct and indirect job losses at more than 20,000.

Full time job losses from collapse of motor vehicle industry in Australia

But this does not take into account the vacuum left by the loss of scientific, technology and engineering skills and the impact this will have on other industries.

…R&D-intensive manufacturing industries, such as the motor vehicle industry, play an important role in the process of technology diffusion. These findings are consistent with the argument in the Bracks report that R&D is a linchpin of the Australian automotive sector and that there are important knowledge spillovers to other industries.

Collapse of the housing bubble

An oversupply of apartments will lead to falling prices, with heavy discounting already evident in Melbourne as developers attempt to clear units. Bank lending will slow as prices fall and spillover into the broader housing market seems inevitable. Especially when:

Current prices are supported by strong immigration flows which are bound to lead to a political backlash if not curtailed;
The RBA is low on ammunition; and
Australian households are leveraged to the eyeballs — the highest level of Debt to Disposable Income of any OECD nation.

Debt to Disposable Income

Falling demand for iron ore & coal

China is headed for a contraction, with a sharp down-turn in growth of M1 money supply warning of tighter liquidity. Falling housing prices and record iron ore inventory levels are both likely to drive iron ore and coal prices lower.

China M1 Money Supply Growth

Australia has survived the last decade on Mr Micawber style economic management, with something always turning up at just the right moment — like the massive 2009-2010 stimulus on the chart above — to rescue the economy from disaster. But sooner or later our luck will run out. As any trader will tell you: Hope isn’t a strategy.

“I have no doubt I shall, please Heaven, begin to be more beforehand with the world, and to live in a perfectly new manner, if — if, in short, anything turns up.”

~ Wilkins Micawber from David Copperfield by Charles Dickens