The government may have agreed a temporary fix to the carbon dioxide shortage which is threatening to exacerbate food shelves emptying at supermarkets, but investors are weighing the impact on the companies affected amid calls for a structural overhaul in gas supplies.
A spike in gas prices to record levels has forced at least seven energy suppliers out of business, but has also shuttered fertiliser plants which produce the majority of Britain’s CO2 supply. This cheap but essential by-product is used for everything from fizzy drinks to stunning animals for slaughter and even cooling nuclear power plants.
‘Currently the UK is over-reliant on a small number of suppliers, who in turn, are very sensitive to these high natural gas prices,’ said Anthony Catachanas, fund manager of VH Global Sustainable Energy Opportunities (GSEO), a £244m investment trust investing in green infrastructure.
‘While most alternative CO2 sources would be impacted by high natural gas prices, there would be differing levels of ability to absorb such price hikes between them.’
The government is bailing out the largest fertiliser company, CF Fertilisers, to prop up the country’s CO2 supplies. However, industry chiefs have warned shortages could still increase the pressure on supermarket’s food and meat stocks, which are already under pressure from the HGV driver shortage on top of Covid and Brexit.
Broker Jefferies expects this to weigh on sentiment on shares in the drinks industry and add to inflationary pressures in the wider economy. But he ultimately prove a ‘transitory’ phenomenon.
‘Potential shortages of CO2 in the UK could have a short-term impact on volumes and add to short-term cost inflation,’ said analyst Edward Mundy.
He picked out Britvic (BRIT), the maker of Tango, whose shares have slid 7% this month, as the most exposed named the analysts cover, with the UK market accounting for 70% of sales.
‘Of this, approximately 60% is sparkling and 40% is still. We believe the company is working closely with existing suppliers to minimise future disruption and is looking at alternative sources of supply to access if necessary,’ he said.
The analyst pointed to lessons from a similar shortfall in 2018, saying ‘larger companies were better able to absorb volatility given more flexible supply chains’. Both Coke bottling company Coca-Cola Europacific Partners (CCEP) and Heineken, a big holding in Lindsell Train UK Equity and other Nick Train funds, able to call on their big international footprints to minimise disruption.
‘We would expect promotional activity to be scaled back, with stronger revenue per case. Larger players could take some temporary share if their supply chains prove to be more resilient,’ said Mundy.
Last Tuesday, Business Secretary Kwasi Kwarteng announced an ‘exceptional short term arrangement’ to support CF Fertilisers, whose two plants produce around 60% of the UK’s CO2. The US company’s Teesside facility has resumed operations, although its Cheshire site remains offline.
The agreement lasts for just three weeks, but the government said that in discussions food producers and supermarkets were committed to ‘doing whatever it takes to move to a sustainable market-based solution’ after that.
A key issue is that pressure on fossil fuel companies to reduce investment has not been matched by changes in the way energy is used.
For Catachanas, the recent surge in prices is a ‘confirmation of the importance of natural gas in the energy mix’ to balance and shore up the grid in the medium-term. He said the government was ‘too focused on renewable power generation solely’, paving the way to these kinds of spikes in gas when demand is strong but wind generation happens to be low, as has been the case recently.
One differentiating point from rivals is that, as well as renewables, VH Global Sustainable Energy has this month invested in two gas-fired power plants with carbon capture and reuse capabilities. Catachanas thinks this technology has an important role in addressing environmental concerns.
These so-called ‘peaker’ plants will only run when electricity prices are high while the resulting carbon dioxide, rather than being released into the atmosphere, is not just captured but recycled and can then be used in the food and beverages industries.
‘Adding greater diversity to the domestic supply of CO2, while firming up the power grid through the application of a wider range of renewable energy technologies would be quite an accomplishment,’ he said.
Another reason for including this technology when the fund launched last year was that the UK is dependent on Europe for about a fifth of its CO2 needs, with that security of supply worsening since Brexit.
Robert Minter, director of strategy at Aberdeen Standard Investments, supports the same broad solution to the issue, emphasising that spare generation capacity needs to be much higher.
‘The answer is to use renewables in as mass quantity as can be achieved based on backup capacity from nuclear [and] natural gas peaker plants with sufficient storage,’ he said.
Government intervention in the fertiliser sector to bridge the CO2 shortage, which the Financial Times reported is expected to cost about £20m, stands in contrast to the more high-profile energy sector crisis. Ministers stood by as both Avro Energy and Green, with more than 800,000 customers between them, both folded last week. Energy providers servicing more than 1.5m people in the UK have now gone under.