What is happening in the offshore wind market? Come to that what is happening in the onshore hurricane blowing round Westminster? And even after this market rally, arriving much as we expected last time, what should we still worry about? Valuations, recessions and inflation, all matter even if rate rises don’t now.
A Feeling of Unreality in Westminster
One year in, Rishi looks incompetent and chaotically inconsistent. I simply can’t explain Cameron’s grinning re-emergence, it feels like a bad dream or worse joke. I hope he could never be selected again as an MP, after his murky financial dealings. The House of Lords is clearly less constrained. The arrogant indifference and heavy taint of sleaze can’t be in the interest of voters.
There is a feel of an echo chamber inside Downing Street, of a puppet leader being strung along by unseen forces. Just last month the whole theme of the Party Conference was a fresh start, the last thirty years were apparently rubbish. Then we have this.
To the country and investors, it does not matter, although a half-awake opposition, or slew of oppositions, will be desirable in future; even if opposition politics is now easiest if you just wait for the other side to foul up and social media to rip them apart.
Zero-carbon? Can’t Do it Yesterday?
A lot of notable recent shifts in the offshore wind sector, not surprisingly, as with so many zero carbon panaceas and the rush to do it all yesterday, the wheels are starting to come off. It is nothing like as cheap, or job creating, as the green zealots claimed or hoped. Protectionism is not helping either.
As Platts shows, for September, the more you make, the lower the price, just like real farming. UK offshore wind power is the least desirable in the entire European market.
Nothing wrong with the idea of offshore wind, and experts like SSE in the UK do well on big arrays in shallow waters, planned slowly, at least so far. Although even those are pricey and tend to need massive connecting grid structures.
Both Siemens and Orsted, to a degree newer entrants (at least compared to SSE), have taken a battering. Siemens had acquired a Spanish maker, but during the COVID fall out something came adrift, and it has hit big capacity and quality problems, resulting in billions in write offs – now it is restructuring – with a € 7BN subsidy from a group of banks. Heavy rotating machinery is always engineering hell; sticking it up a windy pole in salt water, is never that wise.
Orsted, the Danish developer, lopped 50% off its share price after ditching projects off Rhode Island and New Jersey – further billions written off. The idea you can put these things up off rocky coasts in areas of strong ocean currents and loads of shipping is quite interesting (and very New York, form over substance).
What torpedoed those projects was funding. The political desire for easy answers to high energy consumption made for poor outcomes (as ever), if everyone rushes to do it all at once, you simply create a cost bubble.
The single unit cost is never the same as for a thousand units; scaling up is always the tough part of any new technology.
Orsted share price – sourced from Yahoo finance – sharp focus on data
So, while Xi and Biden proclaim they will still save the planet, Biden rhetoric meets cost inflation once again, and cost inflation (and higher energy prices, a speciality of his) wins. Toss in protectionism, so that a Danish company is disqualified from his WTO busting subsidies, and the numbers no longer worked.
The Germans meanwhile find their own green funding trick ruled out by their own Constitutional Court, it involved taking a pre COVID funds surplus, and applying COVID emergency rules (on excessive deficit funding) and then spending it all post COVID. Isn’t it odd that didn’t really work? All three parts seem wrong.
Finally, the UK got no takers for this year’s wind farm licences, as the guaranteed power price was too low. Next year the price has shot up, again guaranteeing higher energy prices for UK consumers (and industry) in the process.
Recession, Inflation and Valuations
Of the trio of recession, inflation and valuation, each investor has a particular fear. To me the nasty one remains inflation, and its friend rationing and stagnation. A lot simply can no longer be done. So that the modern solution (see above) of just throwing more money at it, from higher taxation and debt is largely pointless. Indeed, any farmer knows if you quadruple the inputs, it is still quite easy to halve the outputs.
We are deep into public service rationing now; we don’t call it that, but persistent planned under delivery is rationing.
So, service sector inflation with declining ‘outputs’, is the issue. And that’s the funny number ‘outputs’ we still record in GDP, so turning up, and being paid is an output, even if nothing (increasingly the case, both on turning up and doing anything) is actually done.
Recession? Well, I guess so, basic logic still says it must arrive some time; yet I still don’t see big credit defaults or strain and a cooling labour market is clearly beneficial anyway.
And finally, valuations, well nearly everything looks cheap, outside big cap tech in the US, which somehow always feels pricey.
As rates fall through 2024, and funds flow out of cash and fixed interest, and M&A picks up, valuations still appear attractive. Albeit 2024 will (once more) be politically rather interesting.
Still, we could end up with some big questions answered and indeed big characters finally, finally, leaving the stage.
Maybe a summer breeze does lie ahead.
Charles Gillams
19-11-23