# Drought - profit/loss opportunities



## Smurf1976 (19 September 2006)

With the incredibly low rainfall in much of Australia this Winter and official predictions that we are at the beginning of an El Niño cycle (which typically leads to drought) I thought I would start a thread on the financial and market impacts of a continuation or worsening of the drought.

I emphasise that this is not about cheaply acquiring properties as farmers go broke or any other such questioable activity. But rainfall affects so many things that there must be some opportunities for honest profit (or loss).

I'll start the post with my favourite subject of electricity...  

This is not simply about hydro power in Tassie but about a situation which now threatens to affect the industry across all states in the National Electricity Market (NEM). That is, Queensland, NSW/ACT, Vic, Tas and SA. 

Whilst much of the industry is publicly owned or represents a drop in the ocean of some much larger entity, there are exceptions to this. I'm intentionally not mentioning specific stocks here - do your own research before investing!   

The situation as it stands right now is as follows.

1. Tarong (1400 MW) and Swanbank B (480 MW) power stations (Qld, coal-fired) are both threatened with closure due to water shortage. Fuel burning power stations are big water users and the ongoing water shortage means that maintaining water supply to Brisbane may necessarily take priority over power generation. 

Closure of these plants would remove substantial low cost baseload supply from Queensland and thus reduce exports to NSW, or at least increase the price of those exports. Whilst the lights are unlikely to actually go out since Queensland does have a surplus of generating capacity, there would be problems in the event of breakdowns elsewhere in Queensland or NSW.

2. Water storages in the Snowy (3740 MW) are well below normal levels. This may force a biasing of production further towards peak demand times only thus removing significant intermediate supply from the market. Since there would be no loss of peak capacity, the lights won't go out but it does mean that some other (more expensive) power source has to be used more.

3. Water storages in Tasmanian hydro-electric schemes are 31.3% full at present and falling despite Tasmania buying practically all the power it can get (limited by Basslink capacity) from the mainland and some use of local gas-fired generation. Storages fell 0.6% of total capacity in the past week and are about 7% below target minimum levels with that gap steadily increasing.

Whilst a physical supply shortage is unlikely, it does mean Tasmania will be offering much higher prices into the market (in order to intentionally reduce production) if the situation continues. It also means the state will be using far more natural gas than it otherwise would since power generation is the predominant use of gas in Tasmania. 

So what does all this mean?

1. Impacts for coal mines supplying Tarong and Swanbank.
2. Higher fuel use by other power stations across the country, particularly Queensland and NSW. That fuel being predominantly coal but also some gas, particularly in Qld.

3. Lower hydro generation at intermediate and off-peak times from the Snowy and Tasmania.
4. The reduced hydro generation must realistically be offset by some combination of increased coal fired generation in NSW and to a lesser extent SA (since Victorian coal-fired plants tend to run flat out anyway) and greater use of natural gas in Vic, Tas and SA.

5. The overall effect is a reduction in some supply (coal-fired plant in Queensland) and hydro generators only selling at much higher prices so as to reduce output. There is also likely to be an effect on hydro generators other than Snowy in NSW and Vic if the situation continues.

So, in short, less supply and some generators achieving this by only selling at higher prices, more coal burnt (except at two plants in Qld) and more gas used. Obviously this is likely to lead to higher wholesale electricity prices.

Financial impacts: More profit for generators selling into the spot market, potential losses for retailers and major indusry buying from the spot market, higher gas demand, some mines sell more coal (or exports are reduced). If it continues long enough, impacts on long term contract prices. Possible policy implications if it gets bad enough.

Do your own research into specific stocks. I posted this mainly to start the thread as I would imagine that areas other than electricity would provide the greatest profit / loss opportunities if the drought continues.


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## juddy (19 September 2006)

*Re: Drought - profit / loss opportunities.*

well this is certainly not as well thought out as yours Smurf, but how about lead?  Farmers will be using a bit of that in severe drought conditions.

How come there is no tongue in cheek smilie?


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## watsonc (19 September 2006)

The amount of rain we have had this winter hasnt been all that bad I thought. El Niño is a 3 to 8 year cycle! I dont know if it is necessarily starting now. (Not that you said it was for certain)

Water is a big problem in Australia. I constantly joke with my Dad that we should move to another country that has more water.

I worry about housing values in areas where catchments dry up!


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## Smurf1976 (19 September 2006)

watsonc said:
			
		

> The amount of rain we have had this winter hasnt been all that bad I thought. El Niño is a 3 to 8 year cycle! I dont know if it is necessarily starting now. (Not that you said it was for certain)
> 
> Water is a big problem in Australia. I constantly joke with my Dad that we should move to another country that has more water.
> 
> I worry about housing values in areas where catchments dry up!



Record low rainfall this Winter in much of Tasmania and also into the Murray River catchment. As for Queensland, the threat to Tarong and Swanbank power stations is the official word from the Queesland government.

As for El Niño, it sure is quite regular and not in itself cause for panic (it is NOT proof of global warming). But the Bureau of Meteorology considers that an El Niño is sufficiently developed to cause a reduction in rainfall over the coming months whether or not and El Niño is "officially" declared.

As for water in general, we've actually got heaps of it but it's not in the places where present agriculture, city water catchments etc are based. Hence my thinking that there must be some financial issues (potential for profit / loss) with the present situation.

Anyone with any real knowledge of the agricultural commodities markets able to comment on likely impacts?


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## Uncle Festivus (16 May 2007)

Smurf1976 said:


> 1. Tarong (1400 MW) and Swanbank B (480 MW) power stations (Qld, coal-fired) are both threatened with closure due to water shortage. Fuel burning power stations are big water users and the ongoing water shortage means that maintaining water supply to Brisbane may necessarily take priority over power generation.
> 
> Closure of these plants would remove substantial low cost baseload supply from Queensland and thus reduce exports to NSW, or at least increase the price of those exports. Whilst the lights are unlikely to actually go out since Queensland does have a surplus of generating capacity, there would be problems in the event of breakdowns elsewhere in Queensland or NSW.




This has now directly impacted on RIO's coal mine nearby. Coal suppliers to power stations without long term contracts may come under pressure.

Agricultural companies - AAC - chart looking toppy


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