The share prices of Australia's major manufacturers haven't exactly shot the lights out this year.
Like most businesses, Aussie manufacturers' share prices were hit hard during the COVID-19 panic selling in February and March.
But even before the pandemic swept across the world, the local manufacturing industry was hobbled by some of the highest energy costs in the world.
When my family and I first moved to Australia in 2010, that came as a shock. We're talking about a country with an abundance of coal and gas, not to mention wind and sunshine, after all.
Even after more than a decade Down Under, the quarterly electric bill is still greeted with rightful dread. Living in a large, older house with a pool and several outbuildings, our annual bill adds up to the equivalent of a second hand car, or a first-class vacation.
And that's just a residence.
Imagine running warehouses full of electrified equipment. Or a smelter!
With gas prices in Australia running as much as three times as high as what manufacturers pay in the United States, you can see why many have shut their doors or moved overseas. And why the remaining companies are facing an uphill battle with international competitors.
And high energy costs can hit their share prices well beyond the cash they shell out to run their equipment.
Second and third order consequences
The second and third order consequences — or ripple effects, if you prefer — to Australia's world leading high energy costs come on numerous fronts.
The most obvious is that when people pay hundreds of dollars per month just to keep the lights on in their home, they have less money to spend on other goods and services. Or to potentially save or invest in shares. And with consumption making up some 60% of Australia's GDP, any crimp in consumer spending will ripple through the wider economy.
Adding to those consequences, when manufacturers are paying a mint to run their equipment, they logically have to up the price of their goods. Meaning households, already out thousands of dollars per year more than they potentially need be in energy costs, can afford less of the stuff they'd like to buy. Including the houses they live in.
Lindsay Partridge is the managing director of Brickworks Limited (ASX: BKW). As the name implies, his company makes bricks. Lots of them. He says that the high costs of energy Brickworks pays gets passed on into the cost of homes. Partridge said (as quoted by the Australian Financial Review), "We've had to survive, we pass some of it on, every homebuyer is affected."
Gas-led recovery
Enter the Morrison government's gas-led recovery plan.
You may have read that the Government is planning to offer taxpay support and subsidies to help usher in new gas infrastructure. And you won't be surprised that any kind of government involvement in the markets has met with mixed reactions.
In a nutshell, the National Gas Infrastructure Plan is intended to reduce the costs of domestic gas and revive domestic manufacturing. That should both spur the post-pandemic recovery and reduce Australia's reliance on offshore suppliers.
Unsurprisingly, the majority of gas companies and manufacturers are applauding the plan.
Santos Ltd (ASX: STO) chief executive Kevin Gallagher said (as quoted by the AFR):
The Prime Minister's National Gas Infrastructure Plan is very welcome because there are missing pipeline links that are needed to connect new projects like Narrabri and new basins like the North Bowen, South Nicholson in Queensland and Beetaloo in the Northern Territory.
We also know that the existing pipeline route to southern markets from Queensland is constrained and long, therefore transport is expensive, so we need more pipeline options to get Queensland gas south by the middle of this decade.
While these are long-term plans that won't bring down the cost of domestic energy overnight, you can think of it like building highways or rail between vital cargo routes. With better infrastructure, transport prices go down.
Shorter term the government is also considering securing gas from domestic producers and possibly offering it to manufacturers at lower costs to get the economy back up to speed.
Which ASX shares look to benefit?
First, to be clear, none of these plans are locked in yet. And the benefit to companies' share prices will play out over the long-term. But if you're a buy to hold investor with an investment horizon of 3 to 5 years, there are a number of ASX shares that could surge with lower energy costs.
You could look into some ASX energy companies, like Santos itself, as one way to play this.
But from a manufacturing angle, I think Transurban Group (ASX: TCL) and Brickworks are two shares that are poised for solid share price gains over the mid to long-term.
Transurban Group because it not only should benefit from more cars on its tollways with lower energy costs. But also because the company's road construction arm is energy intensive itself.
As for Brickworks, lower energy costs will greatly reduce its overhead as well as lowering the cost of its bricks, likely driving an increase in demand for those same bricks.
Transurban's share price is down 4.5% year-to-date, and up 42.2% from its 19 March low.
Brickwork's share price is down 2.0% since 2 January and up 49.0% from its 22 April low.
