US Gas Producers Stand to Gain As Poland Looks Beyond Russia for Gas Imports

Poland may need to change its energy mix

The European Union (VGK) (EZU) (HEDJ) has been requiring Poland (EPOL) (SPOL) to cut its carbon emissions for some time now. According to the EU’s de-carbonization policy, emissions should be reduced by 40% by 2030 and by 80% by 2050, compared with 1990. This implies that Poland would have to change its energy mix where 81% of electric power is derived from hard (anthracite) coal at present.

Poland is the largest hard coal (KOL) producer in Europe, with companies such as Kompania Weglowa (WSE: KW), Jastrzębska Spółka Węglowa (WSE: JSW) (JASTY), Katowicki Holding Węglowy (WSE: KHW), and Lubelski Węgiel Bogdanka (WSE: LWB) actively engaged in coal-mining.

The lack of alternative energy sources and the presence of trade unions in the industry have so far prevented the economy from diversifying its energy sources beyond coal. Moreover, the economy in its current state is largely dependent on Russia (RSX) for its gas supplies.

Poland’s energy shakeup

This is set to change now as the government looks to shake up energy dependence and diversify its energy sources. According to Grzegorz Tobiszowski, Deputy Energy Minister of Poland, by 2030, nearly 60% of Polish energy will come from bituminous coal and lignite. Bituminous coal contains less than 86% fixed carbon while (anthracite) hard coal contains 86% or more fixed carbon.

“Within the next five years we want to lead to Poland’s full energy independence,” said Poland’s Deputy Prime Minister and Finance Minister Mateusz Morawiecki, who sees the economy becoming a gas distribution hub in the next 10 years. “Today we are bound to the Russian [gas] monopoly [Gazprom (OGZPY)] by a bad deal, we pay more for gas supplies than Germany (EWG),” Morawiecki added. State-owned oil & gas company, Polskie Górnictwo Naftowe I Gazownictwo aka PGNiG SA (WSE: PGN) (POGWY), says it pays more for Russian gas than Germany. Moreover, Russia has a history of using its gas and oil exports as a tool to exert political pressure on Poland

Poland energy shakeup: how Russia’s loss may be America’s gain

Poland is now looking towards the US (SPY) (IWM), as US gas is more competitively priced. Last month, Poland received its first shipment of US-produced gas from Cheniere Energy, Inc. (LNG).

With Poland taking its first steps towards clean energy generation and to diversifying its energy sources, US natural gas producers (UGAZ) (UNG) (DGAZ) stand to benefit. A long-term gas deal with U.S. gas producers such as Chevron Corporation (CVX), Sempra Energy (SRE), Cheniere Energy (LNG), Sunoco LP (SUN), and NGL Energy Partners LP (NGL), would definitely reduce Poland’s reliance on supplies from Moscow-based Gazprom PJSC (OGZPY). President Donald Trump’s recent visit to Warsaw is also seen as an attempt to bolster Poland’s efforts to move beyond Russia for its natural gas imports.

Polski Koncern Naftowy Orlen (WSE: PKN) (PSKZF), Grupa Lotos SA (WSE: LTS) (GPOLY), Lotos Petrobaltic S.A., Unimot SA (WSE: UNT), and PERN Przyjazn SA are other prominent energy players in Poland.

China’s Ban on North Korean Coal Supplies Is A Silver Lining for Mongolia

Mongolia’s coal exports up nearly 500%, courtesy China’s ban on North Korean coal supplies

While the copper (CPER) and gold (GLD) mining industries in Mongolia have increased foreign investment to look forward to, the coal (KOL) industry has a slightly different outlook. May 2017 saw Mongolian coal exports to China (FXI) (YINN) surge 42% from a year ago to 3.16 million tonnes. China’s ban on North Korean coal supplies proved to be a silver lining for Mongolia which quickly stepped up to fill in the supply gap, along with Indonesia (EIDO). The nation is a large supplier of anthracite coal that is widely used by the steel industry. Mongolia’s overall coal exports had risen by nearly 500% as of May 2017, primarily driven China’s aforementioned ban on North Korean anthracite coal supplies. With global coal prices rebounding, the boost in exports was particularly lucrative.

China halted all coal imports from North Korea in February for the rest of 2017 amid growing tensions in the Korean Peninsula following the test firing of the Pukguksong-2 medium long-range ballistic missile, which China viewed as a provocation.

Cyclone Debbie may bring further windfall to Mongolia

Cyclone Debbie in Australia (EWA) (March 23- April 7), which affected areas including Queensland, New South Wales, and New Zealand, also resulted in a significant shortage in the global coking coal market. This led to a sharp increase in coking coal prices, again, benefitting Mongolia’s case.

Energy sector attracting investment too

And, it’s not just metals and mining that’s attracting investment into the economy. In an announcement made in mid-June, the World Bank committed to contributing $54.4 million towards reliable electricity and renewable. The funding will include assisting in the development of the country’s first large-scale, 10 MW solar PV power plant. “We are encouraged by the government’s target to increase the share of renewables to 30% by 2030. With its abundant solar and wind power resources, the country is now considering to more effectively and efficiently incentivize renewable energy investment to fully use its potential,” said Peter Johansen, Senior Energy Specialist at the World Bank.

Read Three Reasons Why Investors Are Still Betting on Mongolia to understand more about why investors have continued to bet on this Asian (AAXJ) (VPL) nation.

Why Peru and Colombia Have a Higher Spread of Profitability than Emerging Markets Globally

Higher profitability + idiosyncratic opportunities

Felipe Asenjo, regional head of equities at SURA Asset Management sees valuable investment opportunities in the Pacific Alliance countries of Mexico (EWW), Chile (ECH), Columbia (ICOL) and Peru (EPU). Asenjo expects companies in these regions to grow at 17% CAGR over the next 3 years. “The Pacific alliance has always had a higher spread of profitability than global emerging markets… the second region in the world in the last 15 years with the highest delivery of earnings growth,” said Asenjo.

Meanwhile, Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JP Morgan (JPM) Asset Management sees idiosyncratic investment opportunities in Peru and Colombia.

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Private investment in Peru (EPU) is expected to bounce back and grow 0.5% in 2017 and gradually reach 6.5% growth by 2021, according to the Economy and Finance Ministry. The Ministry expects greater infrastructure investment due to the resumption of projects linked to Brazilian enterprises, to be the primary driver of such growth. The agency also expects increased mining activity to boost private investment. The Finance Ministry also forecasts public investment to rise by 15% in 2017 and in 2018.

The Peruvian economy has already shown its resilience towards the El Niño phenomenon (causing heavy rains and flooding), by slowing less than expected. Prudent actions taken by the central bank such as cutting interest rates should “boost activity” and put Peru on track towards an expected 3% overall economic growth, claims Prime Minister Fernando Zavala.

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According to Santiago Angel, head of the Colombian Mining Association, enormous potential lies on offer in the mining industry (XME) in Colombia (ICOL), which serves as a major growth engine for the economy. Angel sees the industry bringing in a whopping $1.5 billion in 2017 and $1.7 billion in 2018, with a five-year investment of $7.5 billion; provided the government guarantees legal certainty to businesses. Coal (KOL), gold (GLD), and copper (COPX) remain the three main mining sectors in Colombia.

AngloGold (AU) and Eco Oro Minerals (GYSLF) are the larger players in Colombia’s gold sector. The biggest coal companies are Drummond, Glencore (GLNCY) (GLNCF), Murray Energy, Colombia Natural Resources, and Cerrejon, which is jointly owned by BHP Billiton (BHP), Anglo American Plc (AAUKF) and Glencore.

Three Reasons Why Investors Are Still Betting on Mongolia

The light at the end of the tunnel

Not all is well with Mongolia (AZIA). Growth in the economy has tumbled with commodity prices, which account for over 90% of its export earnings. The economy’s GDP grew at just 1% in 2016 due to, a) commodity price decline, and b) slowdown in China demand for copper (JJC) (CPER) and coal (KOL). Meanwhile, the nation’s debt has been burgeoning, reaching $23 billion as of 4Q16.

At a time when Mongolia’s banks threaten an economic crash, Hong Kong-based Asia Frontier Capital is invested in the region. Thomas Hugger, chief executive officer, and founder of Asia Frontier Capital, a firm dedicated to investing in the Asian frontier markets (FRN) (FM), has maintained portfolio exposure to Mongolia for many years. “We see the light at the end of the tunnel,” Hugger recently told Frontera.

Hugger spoke about three key reasons for his belief in this frontier market’s long-term prospects.

1. Copper price recovery

Following a five-year slide (2011-2016), copper prices finally began to recover in early 2016. Over the past one year, the shiny metal’s price has surged 28.7%, with mining giants such as Anglo American (NGLOY), BHP Billiton (BHP), Glencore (GLNCY), and Rio Tinto (RIO), expecting it to rise further as excess supply seems to have come off the market. Moreover, the government initiated stimulus programs in China; which consumes 40% of world copper; have also contributed to the metal’s resurgence. Copper ore accounts for 42% of Mongolian exports.

Mongolia is ranked 12th in the world for copper reserves. The south Gobi Desert alone has an estimated of 35 million tons of copper. UK-based Central Asia Metals (CAML.L) and Rio Tinto (RIO), Canada-based Entrée Gold Inc. (EGI), Turquoise Hill Resources Ltd. (TRQ), and Kincora Copper Ltd (KCC) are among the foreign mining companies engaged in copper mining in Mongolia.

2. Coal price recovery

Coal, Mongolia’s number 2 export (14% of exports), has followed a similar trajectory; a five-year slide followed by a quick recovery through 2016 and continuing. Australian thermal coal has recorded a whopping 68.8% price gain over the past 1 year alone. Foreign companies engaged in coal mining in Mongolia include Australia-based Aspire Mining Limited (ASPXF) and Hong Kong-based Mongolia Energy Corporation Limited (MOAEF).

3. Foreign exchange influx

Hugger also expects the spat over Rio Tinto’s (RIO) $5.3 billion Oyu Tolgoi copper and gold mine in Mongolia to resolve soon. Rio Tinto would then be investing a lot into the second phase of the Oyu Tolgoi mine, thereby opening up a huge additional source of foreign exchange for the nation.

$440 million support extended by the IMF

The economy has recently been able to secure a $440 million loan package from the International Monetary Fund (IMF) to ease the country’s balance-of-payment pressures and support it’s government’s looming debt repayments. “The Asian Development Bank, the World Bank and bilateral partners including Japan and Korea are expected to provide up to another $3 billion in budget and project support, while the People’s Bank of China is expected to extend its 15 yuan billion ($2.2 billion) swap line with the Bank of Mongolia for at least another three years,” the IMF said in a statement on Sunday.

The package is thus, a part of the $5.5 billion bailout envisaged for this frontier market. According to Citigroup, we may see Mongolia tapping the international markets pursuant to the IMF deal.