Shorting Chilean ETF: Energy Crisis 'Confirmed'

Fitch Ratings breaks the big news on the Chilean energy crisis...that was broken a month ago.

But still, it's interesting to see a kickbutt heavyweight office full of smart people say that Chile really does have a doozy problem with its energy sector, and it's not just a figment of this joker's imagination. Fitch did a more detailed job on supply breakdown and its PDF report is worth a read (that's on the first link above), but the message is basically the same as the report published February 11th by Hallgarten (gotta pay there) and available freebie at RGEmonitor (hooray):

• Chile's energy supply is very tight
• Generation costs are soaring
• GDP projections are now out the window
• Brownouts and blackouts are in the cards
• Copper production will be affected
• Etc (read the links if you still care)

Also up recently was this report from Reuters (in Spanish only so far, but zap it through the Google translator if your Castellano is a bit rusty these days) from Chilean power generation company Colbún. The President of Colbún told reporters that supply conditions were "critical" and "at absolute limits" amongst other gems, and made it clear that the day demand went over the limits is the same day Chile gets its first round of blackouts. Oh, it's critical 'till June, too.

Which is all well and good, but unless you live in Chile you need a decent reason to know all this, right? Well, there's a trade or two staring us in the face here.

1. Play the copper supply squeeze that's on the way (you can trade the metal futures, or perhaps a non-Chile exposed Cu producer like Southern Copper (PCU) would work well). This has the downside of running against the bearish grain of the broad markets right now, so maybe the next one is better.
2. iShares MSCI Chile Index (ECH), an ETF chock full of Mapuche exposure (23% in utilities for one thing). It's a pretty new vehicle, having opened for business late last year. The chart here ....(click to enlarge; gracias bigcharts.com, your charts rock)

....shows that right here right now ECH is at a new high, and we think the energy crisis, now made 'official' by an international ratings agency and explained by a Chilean energy bigwig, in no uncertain terms makes our recommendation you're about to read a pretty good trade for the next few weeks, especially when you factor in the drought in Chile that doesn't just leave hydro reservoirs empty, but means the agro sector there is in bad shape, according to all sources.

Our reco on ECH? Short that sucker. Our reco for residents of Santiago? Buy candles.

Disclosure: none

Comments

[tenqulong]

Great opportunistic insight on the COPPER. Besides PCU, perhaps can add DBB, JJM, FCX ?

[creativecharacter]

Mr. Rock, I agree on your assessments of the Chilean power shortage. I have followed it this year and a little last year. Do you speak Castillano? Their newspapers "elMercurio.com gives even more detail of Chile's endevors to obtain fuel from other countries in order to make more electricity as well as heat, and transportation needs. Thanks for the heads up!

[User 164425]

I disagree. Most copper production is on the northern grid which is not affected by the supply issues. Future copper demand is a big question mark too. So even with supply issues its not a surefire trade going long copper.

Regarding power, this is a capacity issue and not related to lack of natural gas or the price of diesel. While diesel costs more, most generators have been running on diesel since 2004. The ones that are going to be squeezed are the ones that can't pass on the higher costs notably some with long term contracts in the northern grid and the ones like colbun whose reservoirs are critically low and rely alot on hydro generation, so shorting powercos across the board is not a good idea. Alot of thermal capacity is coming online in the second half of the year and the LNG terminal should be starting up at the beginning of 2009 so there is the problem of deciding how to value companies based on a short-term disruption, and betting on how the market will value them in the short-term based on the long-term fundamentals.

So, fundamentally I disagree. I think its a mistake to short the CLP right now and I'd rather hedge usd holdings by going long chile, maybe with BCH or SAN. Unless you know alot about the issues at hand its way to easy to be on the losing side of this.

[phdinsuntanning]

just look at the exchange rates now CLP 440/1 dolar, coming down from 700, ECH is flying with chinese copper demand, and energy shortages are being covered by mining corportation, short this at your own risk, now is end of summer in Chile and el nino will bring a lot of rain...

[ottorock]

phdinsuntanning shows why a little knowledge is a dangerous thing.

el nino? nope! what's hapenning now is la nina, and if you don't know the difference why are you bothering to show your ignorance to the world?

[jaimefpozo]

The comments look like a "chilean meeting" Please let me talk, I had my hand up since I started reading.

[phdinsuntanning]

thank you metalite, well, lots of rain, anyway the only important thing in Chile is chinese demand, power plants are coming, guena loco pozo

[UncleLongHair]

Brookfield Asset Management (BAM) recently spun off a partnership named Brookfield Infrastructure Partners (BIP) which in turn owns Transelec, the private electricity distribution company that distributes electricity to 99% of the Chilean population. This is one of the primary two assets they were seeded with when spun off.

Transelec's revenues are indexed to inflation (which in Chile was 4.4% in 2007), and they also get a 9-10% unlevered return on invested capital for improvements. Given the dire state of the electricial infrastructure, such cap ex are in the works. BIP expects to spend around $30-40M per year over the next 5 years as part of a multi-billion dollar cap ex program.

This might be an interesting way to play this same phenomenon.