Speculative Drought Wins
The summer 2026 droughts that have spared no European countries are a huge friction cost to their GDP growth, i.e. it is not only Germany that will pay the price for the low Rhine River waters, but all of Europe, as transport costs shoot up, workforces suffer, agro productions take a hit, and power plants cannot be cooled etc. Droughts are systemic.
Is there any positive twist to this dismal state of affairs?
- One obvious beneficiary should be European Reinsurers. Primary insurers will knock on their doors to share the costs of the 2026 droughts (likely to be enormous as buildings suffer in addition to macro eco impacts), but this will be an opportunity for Reinsurers to crank up prices at last. The propensity of primary insurers to avoid reinsurance on the back of their own stronger P&C pricing may be curtailed. One caveat is the El Nino latest developments. If that converges into winter floods in Europe as happened in July 2021 and then 2024, the Reinsurers’ bill might become a bit hard to swallow.
- Transport is the next big thing. What cannot be transported will command higher prices for alternative solutions. Here the concept of pass-through is essential. It seems that European corporates have learnt their lesson from the 2022 bout of inflation and from the Iran war, and have reorganised their contracts accordingly. Prices can be adjusted immediately with … an extra margin. On that basis, transport operators/logisticians are well positioned to (over)charge. There is no longer any scream of pain about higher diesel prices, which is akin to saying that corporate clients are paying up and shutting up. Next to a Kuehne + Nagel able to arbitrage all modes, one should think of Brenntag and its strong hold on Chemicals transport. On an indirect note, D/S Norden and AP Moller are also making a killing on faster pass-through and capacity scarcity.
- Traders are well positioned by default to play scarcity and pass-through mechanisms. Sadly they are underrepresented. Glencore is the obvious must have, and DKSH can also be had, although its business is dominated by long term contracts.
- Novonesis is in a different league of its own. Its enzyme-based processes are energy-light alternatives to traditional energy-intensive industrial transformations. It may be that the near-term costs of traditional industry in a wave of lasting high temperatures opens new demand for enzymes-based alternatives. The same line of thinking could to a lesser extent apply to the Givaudan, Symrise, Kerry, DSM-Firmenich, as chemical Flavours and Fragrances are an offset to more expensive natural products. This can only apply if pass-through is effective here.
- Droughts and associated heat waves tend to send weaker citizens to hospital for assistance. Equipment providers in ICUs as well as ventilators should benefit. Of particular note is Drägerwerk, which not only supplies ICU equipment, but just as well provides ‘safety’ gear to workers in risk industries (chemicals, firefighting) and the military. On this same safety note, fire-truck supplier Rosenbauer is a must have (sadly no longer covered)
- On the Capital Goods side, many corporate stories are being spun that would address global warming, turning it into a business opportunity. The ones we have in mind are Nexans and Prysmian, as essentially all the ageing grids have to be updated more quickly than anticipated.
- Finally an idea that we raised in June 2024, some Building Materials stocks, starting with Saint Gobain are ‘Nat Cat naturals’ i.e. beneficiaries from the reconstruction business associated with global warming (and floods and storms), and better insulation. Belimo with its HVAC focus also fits the bill, while already made ultra expensive by the AI demand for data centre cooling.
Below is a summary review of the 16 stocks quoted above
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