by David Fessler, Energy and Infrastructure Strategist, The Oxford Club
Tuesday, April 30, 2013: Issue #2023
We all know Washington is working overtime to promote green energy. If you played the moves right, you had the chance to profit handsomely as our leaders fueled the industry’s growth with tax incentives and direct cash injections.
But despite the strongest (and most controversial) of efforts here at home, Europe’s renewable energy initiatives make U.S. efforts look woefully inadequate.
The European Union (EU) adopted a comprehensive energy policy in December 2008. This landmark legislation, part of the Treaty of Lisbon, put renewable energy front and center in Europe. The plan states that renewable energy in the 27 EU member states should be worth 20% of all energy production by 2020.
On the surface, Europe’s energy policy looks like a plan the rest of us should follow. But it has flaws. And it’s those faults that have led one company to shift its manufacturing to the U.S. Rust Belt.
We’ll get to who it is in a moment. First, let’s take a look at why Europe’s renewable energy policies aren’t all they’re cracked up to be.
It starts, like so many things these days, with the sad state of Europe’s economy.
The Euro Mess
Despite the bailout hype, Europe’s finances have continued to worsen. It’s a full-on sovereign debt crisis. Mired in debt, most EU member states are now paying strict attention to their bottom lines. They have to.
Take France, for example.
Look at the chart below. It depicts France’s PMI report. It combines the output of the country’s service and manufacturing sectors. The index has fallen to a four-year low.
But France isn’t unique. The same thing is happening all over the EU. We’ve all heard and seen what’s happened in Italy, Spain and Cyprus. And there’s more pain ahead.
Flee the Pain
Remember, the EU’s goal was to boost renewables to 20% of all energy production by 2020. This dovetailed nicely with a common goal throughout much of Europe… energy independence from Russia.
Unfortunately, few elected leaders realized how expensive the move to renewables could get. But corporate CEOs of European industrial companies had a hunch. They have a long history of complaints regarding the high cost of environmental legislation. And for good reason – the laws always lead to higher energy prices.
It’s those high prices that have thrown another curve at Europe’s struggling economy… and a potential boon for our Rust Belt Revival.
Wolfgang Eder, CEO of Austrian steelmaker Voestalpine, understands what’s at stake.
Here’s what he had to say in an article in The New York Times: “This is a really serious issue, not just for the steel industry but also for a lot of other industries. [In Europe], the cost of oil and gas and electricity is structurally higher than in all other parts of the world.”
Hmmm… we can see where this story is headed.
True to our Rust Belt Revival theme, Eder’s company plans to build a new steel plant in North America where not only natural gas is up to 75% cheaper than in Europe, but electricity prices are cheaper as well.
Setting Sail for America
In addition to Voestalpine, many other companies working in the energy-intensive chemical and steel sectors aren’t hanging around.
They want to invest in the land of cheap energy: the United States.
One of the biggest movers is the 12th largest company in Germany and the largest chemical company in the world. BASF SE (OTC: BASFY) holds the No. 1 spot in more than 75% of its businesses.
And now it’s headed to Middle America. More specifically, Louisiana.
In a recent Washington Post article, Harald Schwager, head of European Operations for BASF, had this to say about the move: “We Europeans are currently paying up to four or five times more for natural gas than the Americans. Energy efficiency alone will not allow us to compensate for this.”
BASF’s Louisiana plant isn’t the company’s first foray across the Atlantic. Including the formic acid plant, the company has invested more than $5.7 billion in new manufacturing plants here.
It’s likely BASF’s investment in the United States will continue to expand.
“Once a customer of ours decides to build a new factory in the U.S., then this customer will request from us to be close by with our production,” Schwager said. “And so, over time, you see a self-accelerating process, which will move production into the U.S.”
From an investment standpoint, you’d have to look long and hard to find a better-performing large-cap company than BASF. A decade of strong growth in sales and earnings has paid off handsomely.
Shareholders have averaged a 20% annual total return.
And income investors would be hard-pressed to find a better dividend grower than BASF. It yields 3.58%. But here’s the best part: It’s had an average annual dividend increase of 16% for the last 10 years.
It’s clear the Rust Belt Revival we’ve talked about in previous articles is attracting companies from all over the world… spawning incredible investment opportunities in the process.