The devastating bushfires raging across the country and continued dry season could have a huge impact on ASX shares. The growing threat of extreme weather conditions could have numerous effects on the bottom line of companies listed on the ASX, from loss of inventory to reduced productivity.
Here are a few examples of how bushfires and drought can impact stocks on the ASX.
Higher insurance claims and premiums
In November, Insurance Australia Group (ASX: IAG) announced at its investor presentation that bushfires are one of the fastest growing climate risks in Australia. The company also lodged a report with the ASX calling for more government funding for bushfire mitigation.
According to analysts, future profits for insurers could be impacted if insurance claims exceed $500 million in value. The Insurance Council of Australia estimates that the number of claims in November and December was valued at around $182 million, accounting for more than 2,300 destroyed homes, cars and machinery. However, this figure is set to grow, given that the bushfire season is still in its early stages and many people are yet to visit their homes to assess the damage.
Inventory and production costs
In early December, Whitehaven Coal Ltd (ASX: WHC) provided an update on the company's FY20 guidance. The announcement saw Whitehaven warn that full-year guidance would be negatively impacted, partly due to inclement weather.
Whitehaven cited that FY20 earnings could be impacted by unanticipated productivity losses due to adverse weather conditions across northwest NSW. The company announced that production at Maules Creek had been interrupted by numerous, unscheduled production stoppages. Due to safety considerations, smoke, dust and haze events from ongoing drought conditions and fires have resulted in numerous work stoppages.
As a result, Whitehaven revised coal production targets from between 22Mt and 23.5Mt to a lower range of 20Mt to 22Mt. The revised guidance also factored in further disruptions that could happen in the summer months.
Impact of water shortages
Duxton Water Ltd (ASX: D2O) is the only company listed on the ASX that provides investors with direct exposure to Australian water reserves. In arduous times such as these where water reserves are at a high premium, companies like Duxton can generate higher returns by capitalising on increasing demand.
Duxton owns various water entitlements and leases them to agricultural businesses. The company's operations are focussed on the Southern Murray Darling Basin region, where interconnected water systems are valued at an estimated $27.3 billion.
Since the company listed on the ASX in 2016, Duxton has increase its net asset value by 73.37% from $1.07 to $1.72. The company has also paid a total of $11.56 million in dividends to date.
Foolish takeaway
In my opinion, it is important that investors take into account how disasters like drought and bushfires could influence their long-term investments. Understanding these factors could allow for better risk management, whilst also providing other investment opportunities.
