A unique ‘credit crunch’ predicted for the energy sector
We anticipate further structural dislocation for the energy sector through 2021. A continuation of the underlying trend of capital moving away from carbon intensive generation is expected and thermal coal will continue to present challenges for certain assets. Almost irrespective of project economics, financiers are withdrawing from the sector to comply with environmental, social and governance commitments, resulting in a unique ‘credit crunch’.
On the renewables side, investor appetite remains strong however we are beginning to see the impact of lower power prices and curtailment manifest itself in refinancing challenges as assets move beyond the development phase. With several thermal coal generation assets approaching end of life, Government policy is likely to have a significant influence on what the next phase of investment in generation and distribution looks like.
COVID-19 adversely impacted gas prices last year, and despite LNG export volumes hitting record highs, revenue was well down on the year prior. Early indications suggest that 2021 will see a gradual improvement in pricing.
The resources sector has held up remarkably well, with associated exports in large part underpinning the resilience of the Australian economy. We expect this to continue in 2021 even if trade tensions with China persist, albeit the price gains in some commodities (iron ore, gold and nickel) are likely to flatten out.
Iron ore demand may soften when historical competitors (e.g. Brazil) return to normal production. Resilience and rising prices contributed to buoyancy and optimism within the sector, and well-supported capital raisings are expected to remain in 2021. At the same time, assets that are supported by flawed capital structures or are exposed to unacceptably high sovereign risk will likely be subject to tactical restructuring measures, designed to protect value and allow the exit of stakeholders no longer able to contribute to supporting operations.
