00:00Australia's Weather Bureau has warned that a very strong El Nino event this year could be the most severe in
00:06decades.
00:07Fitch Ratings says utilities and agriculture are most exposed to the developing weather pattern,
00:13with hotter, drier conditions set to strain water supplies, lift electricity demand and heighten bushfire risk.
00:20El Nino historically cuts crop yields, adding stress to food, supply chains and prices,
00:26but energy retailers may benefit from stronger demand.
00:30Joining us now is Bruce Lee, Director for APEC Corporates at Fitch.
00:34Great to have you on the program, Bruce.
00:36So there are, I guess, some winners and losers when it comes to the impact from El Nino,
00:40but talk to us about the sectors that are most vulnerable here.
00:46Correct. Thank you, Avril. Thank you for having me here.
00:48So we believe, as a Fitch Rating Agency, we believe that utilities and agriculture are most vulnerable to the effects
00:58of El Nino.
00:59But to set the context, I mean, even though meteorologists are expecting a pretty strong El Nino event here happening,
01:07but in recent years, I mean, the last event back in 2023, 2024, meteorologists back then were expecting it to
01:14be a pretty strong one,
01:15but it turned out to be not as persistent and not quite as strong and intense as expected.
01:21So, yeah, definitely that depends on the severity it brings to Australia.
01:26And in terms of the impact on sectors, we believe that utilities and agriculture are most exposed.
01:33For utilities, if you look at water utilities, you find that there's big expectations of reduction in water inflows and
01:43storage,
01:44and that could weaken revenue and increase those utilities operating expenditure in the near term.
01:51And for energy retailers, definitely this would lead to an increase in your electricity demand,
01:59putting pressure on spot prices as well as grid stability.
02:03And a combination of high spot prices and possibly unplanned outages could lead to short-term earnings volatility.
02:13Bruce, you raised a good point about how, you know, we've seen this episode in 2023-2024.
02:24So it sort of happened before.
02:26Whether it pans out to the intensity of back then is a separate question.
02:32But talk to us about how corporates have been spending the time perhaps also preparing for a weather event like
02:39this.
02:41Correct. So the key message is Australians are no strangers to this sort of extreme weather events.
02:46We've been exposed to regularly and shuffled between La Nina and El Nino.
02:51So, I mean, the good thing that it brings, right, it's that corporates have been embedding this in the enterprise
02:59risk management strategy.
03:01And we look at the possibility of, I mean, network resilience as a topical issue.
03:06And on that, we see that a lot of our utilities or transmission and asset distribution asset owners have been
03:14regularly reinvesting their capital
03:16into making sure that the network is resilient for this sort of events.
03:24There are some sectors that could be, you know, benefiting, I guess, in a way from the improved energy demand
03:36given these weather events.
03:38Talk to us about what you're seeing or expecting in terms of the outlook, especially for energy producers.
03:46Correct. So, I mean, thermal coal producer expected to be one of the few clear beneficiaries of the El Nino
03:54because compared to La Nina related floodings,
03:58drier conditions are typically more favourable as sort of entails typically less weather related disruptions.
04:06And this could increase supply volumes. And in terms of demand, hotter weather across Asia, as well as your reduction,
04:16you know, hydropower availability.
04:18This could lead to increased reliance back to, you know, traditional fossil fuel generation.
04:25But this in itself would definitely lead to some challenges in terms of the energy transition that Australia is currently
04:32undergoing.
04:36So, what about how the impact may vary by region?
04:43Yeah, I mean, it depends. It depends on the severity. I mean, it's not really just El Nino that's that
04:50is a key driver.
04:51It also has to be dependent on the Indian Ocean Dipole as well.
04:56Typically, we would see that the eastern seaboard like Queensland, New South Wales, as well as South Australia's would be
05:04typically more exposed
05:05to the effects of El Nino and dry weather conditions.
05:11Bruce, thank you so much. We appreciate your time with us today.
05:15Bruce Lee is director for APEC Corporates at Fitch.
05:18We have more on Australia Ahead every Tuesday at 10.40 a.m.
05:21If you're watching in Sydney, 8.40 a.m. in Hong Kong.
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