Carbon pricing can affect leverage, profitability of Asia’s heavy emitters

HEAVY emitters in Asia could face lower profitability margins and more difficulties to pay off their debts as carbon schemes become increasingly implemented in major economies.

A Barclays report released on Tuesday (Dec 6) found that the earnings before interests, taxes, depreciation and amortisation (Ebitda) margins of some of these corporates are likely to turn negative if a high carbon price is placed on their disclosed Scope 1 and 2 emissions.

In examining the effects on leverage and profitability, the authors of the report applied three carbon pricing scenarios to 13 Asian issuers in the power, aluminium, steel, oil and gas sectors, as well as those that are diversified.

The three pricing scenarios are: 1) the current global average carbon price of US$6 per tonne; 2) a medium-term weighted-average price outlook for the Asia-Pacific at US$20 per tonne; and 3) the European Union’s benchmark price of US$76 per tonne.

Out of the 13 issuers examined in the report, the effects of a carbon pricing scheme are calculated to be worst for Huaneng Power, an electric power company from China.

According to Barclays projections, it is the only issuer which could have its Ebitda margins reverse from its 2022 estimate of 14 per cent, when carbon costs are not included, to -7 per cent, based on the second pricing scenario of US$20 per tonne.

When the carbon price increases to the EU benchmark rate of US$76 per tonne, Huaneng’s Ebitda loss grows to -65 per cent.

Other issuers that are expected to experience Ebitda losses, based on EU’s carbon price, are Indonesia’s power company Cikarang Listrindo (-1 per cent), China’s aluminium companies Chalco (-8 per cent) and China Hongqiao (-12 per cent), as well as India’s JSW Steel (-3 per cent) and China’s Shanghai Baosteel (-4 per cent).

Leverage is also projected to go up even among issuers that did not experience an Ebitda loss from any of these three pricing scenarios, the Barclays report noted.

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For example, the report found that the leverage of Chinese oil and gas company Sinopec, which is currently estimated at 0.48, will increase to 0.95 if the EU’s carbon price is implemented.

For India’s Tata Steel, the leverage, which is currently at 1.38, increases to 37.7 in the same scenario.

Overall, the report found that the effect of a higher carbon price on leverage and Ebitda margins is much greater for the power, aluminium and steel sectors. The oil and gas sector was the most resilient, with carbon prices having the smallest effect.

The report stated that with carbon pricing playing a more significant role in public policy and as carbon schemes are implemented in many major economies, investors will increasingly need to consider their implications for the highest emitting sectors. This is even though there is still no consensus on implementing carbon pricing globally.