Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hello Macro Brief listeners, this is Harold van der Linde, Head of Asian Equity Strategy at HSBC and host of the Under the Banyan Tree podcast here in Hong Kong.
Speaker: On this week's podcast we're asking how global investors are feeling about putting their money in mainland China.
Speaker: It's been a pretty rough year on the Shanghai and Shenzhen markets, but are we now turning a corner?
Speaker: I put that question to our Head of Asia Research, Stephen Sun, who's just wrapped up a world tour of one-on-ones with major investors.
Speaker: Hope to see you under the banyan tree where we put Asian markets and economics in context.
Speaker: This podcast was recorded for publication on the 18th of April 2024 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Hello, I'm Peter Stegall in London.
Speaker: Welcome to the Macrobrief.
Speaker: This week I'm speaking to Amy Tyler from the Environmental, Social and Governance team and Sean McLaughlin, an equity analyst who leads our coverage of the European industrial sector.
Speaker: We'll be talking about their recent research into the environmental and social costs of keeping things cool as global temperatures rise.
Speaker: And of course, to identify the risks and opportunities for investors, because the cooling market, that's air conditioning and refrigeration, is worth about $270 billion in annual sales across residential, commercial, industrial and transport applications.
Speaker: Amy and Sean, welcome.
Speaker: Thank you for having us.
Speaker: Thank you.
Speaker: So last year you examined the challenges of decarbonising heat across buildings and industries.
Speaker: This time you're looking at decarbonising cooling.
Speaker: I want to start with you, Amy, because you see the risk of a damaging feedback loop associated with the sector.
Speaker: What do you mean by that?
Speaker: So we rather ironically see cooling as a beneficiary from climate change, and this is because of the damaging feedback loop it creates.
Speaker: So this is where emissions from cooling, whether this is direct via refrigerants or indirect via the power source, contribute to global warming, which further increases cooling demand.
Speaker: So if we do look at some of the types of cooling, space cooling and refrigeration are the two primary cooling forms.
Speaker: Space cooling represents fans, air conditioners, dehumidifiers.
Speaker: These provide the thermal comfort, whereas the refrigeration keeps these goods at fixed temperatures.
Speaker: So that can include food and healthcare products.
Speaker: Now, there's one line in your report that really caught my eye.
Speaker: You say that artificial intelligence is driving increased demand.
Speaker: What's happening there?
Speaker: So we do see opportunity for cooling in data centres and AI.
Speaker: So this is because cooling is critical to data centres to prevent them overheating.
Speaker: So that regulates its temperature, airflow, humidity.
Speaker: And cooling does account for about 40% of a data centre's electricity consumption.
Speaker: And with this expected rise in energy consumption of data centres, this is a bit of a concern for cooling emissions.
Speaker: The adoption of AI is a significant driver of energy consumption and cooling needs due to this greater workload and higher power chips, which then contribute more heat.
Speaker: If we do look at the global data centre cooling market, it's expected to grow threefold by 2030 and AI is this key driving force.
Speaker: In the report, you also mention a few other factors that are likely to underpin cooling demand.
Speaker: Can you talk us through a few of those?
Speaker: Yes, so the most fundamental driver of cooling is climate, specifically temperature and humidity.
Speaker: But for those experiencing hotter climates, it is commonplace to utilise air conditioning, whilst cooler regions can suffice with electric fans during hotter periods and heat waves, for example.
Speaker: So thermal comfort is crucial for everyone, but not everyone is able to experience cooling, whether this is affordability or access.
Speaker: And as regions develop growing populations and incomes, increases demand for cooling.
Speaker: So economic development increases urbanisation rates and often results in ageing populations, which do increase cooling demand further.
Speaker: And as access improves, cooling capacity grows.
Speaker: So Amy, you have this amazing statistic in the report that the use of electricity in China for cooling purposes increased 68 times between 1990 and 2016.
Speaker: That's a colossal increase.
Speaker: Yes, so China has seen a massive increase in cooling demand, very much in line with the economic development they've experienced.
Speaker: And other countries might see the same thing in the coming years, perhaps?
Speaker: Absolutely.
Speaker: India is definitely one to watch in terms of cooling demand as well.
Speaker: Now let's bring our Head of Industrials Research, Sean McLaughlin, into the conversation.
Speaker: So Sean, one of the areas the report focuses on is the difficulty associated with refrigeration and the so-called cold chain.
Speaker: What is the cold chain and what are these difficulties?
Speaker: Well, the coal chain is a network of specialist facilities and vehicles that transport perishable goods.
Speaker: So from the grower to the end consumer via air, via sea, via land.
Speaker: And it consists of the actual containers and trucks themselves, as well as the
Speaker: specialist infrastructure required and the planning also required to make sure that things remain at the ideal temperature.
Speaker: And we're seeing growth in the food and beverage industry as well as increasing use in pharmaceuticals.
Speaker: So think vaccines.
Speaker: So what's the sustainability aspect of this cold chain?
Speaker: Well, the coal chain is quite energy intensive.
Speaker: If you look across installed capacity in terms of gigawatts of cooling, the majority is in space cooling.
Speaker: But actually, most of the energy consumption happens on the refrigeration side.
Speaker: And the sustainability question going forward really is consumers may become more demanding of companies to ensure that they are not...
Speaker: buying into a polluted transport chain and we'd expect companies to come under more scrutiny about the carbon footprint associated with transporting cold goods.
Speaker: So let's take stock.
Speaker: Rising demand driven in part by data centres and in part just keeping the air conditioning on more and more as temperatures rise and there's this demand for more refrigeration as well.
Speaker: So how are industrial companies responding and where are the opportunities for investors?
Speaker: Yes, well, I'd say that the main thrust of where industrials can help with sustainability of cooling really comes down to the basic efficiency of the technologies.
Speaker: So we've seen a real increase in the basic efficiency of air conditioning units over the past decades through introduction of technologies like variable speed compressors, for example.
Speaker: And more and more we would expect efficiency to be a key driver of
Speaker: I think policy on one side and also on how companies maybe maintain a competitive advantage.
Speaker: Now, the risk of course is that if we do see a lot of emerging market growth in space cooling, then questions around efficiency and energy standards, is that going to actually increase a lot of emissions associated to cooling in these countries?
Speaker: So it's important from a company's perspective that they are driving the change.
Speaker: So a lot of new technologies entering the market.
Speaker: We also make the example of heat pumps, which is a very efficient way of creating heat and cooling with the same equipment.
Speaker: In the report, you also talk about overall electricity supply and how decarbonising that can help in decarbonising the cooling industry as well.
Speaker: So the rise of renewables must also be offsetting some of the consequences.
Speaker: Is that right?
Speaker: Well, yes.
Speaker: It's ultimately an assumption that...
Speaker: the sustainability of cooling also depends on the lowering of the carbon footprints in the power mix.
Speaker: So to give you a key stat from the report, 20% of global electricity consumption goes to cooling.
Speaker: So really, it is the, you know, how green is the electricity used that ultimately drives a greener cooling sector.
Speaker: So, I mean, we're talking about a huge market here.
Speaker: So presumably there are some big investment opportunities.
Speaker: Yes, indeed.
Speaker: And we've published a separate report that's looking at 20 stocks under coverage at HSBC that we think are exposed of beneficiaries of growth areas in cooling.
Speaker: And we break this down in broadly across four categories.
Speaker: The first and the largest is the supply chain.
Speaker: So think component suppliers from compressors to heat exchangers to actuators and valves.
Speaker: to appliance and system providers to some of the providers of specialist control systems to these appliances and systems.
Speaker: The second category is combined heating and cooling, so this specifically is heat pumps.
Speaker: The third category looks at passive cooling, so this is what you would put into building design to ensure better
Speaker: thermal performance of buildings and this ultimately boils down to insulation materials.
Speaker: And the fourth category is distributors and service providers of cooling.
Speaker: So some specialist
Speaker: cooling and refrigeration equipment distributors, as well as providers of services such as district cooling.
Speaker: So district cooling.
Speaker: Now, this really caught my eye in the report.
Speaker: How does it work?
Speaker: Well, district cooling, it's a business model that we're seeing emerging in the Middle East.
Speaker: And it really is, I guess it's the opposite of district heating.
Speaker: In other words, you're
Speaker: you're distributing cold air or water through a network of pipes to be able to cool a number of households or let's say indoor spaces at the same time.
Speaker: So Amy, if I can turn back to you, you touched on some of the social implications and the consequences of living on a hotter planet.
Speaker: What are some of the areas that concern you?
Speaker: Absolutely.
Speaker: So these rising temperatures, heat waves and droughts do pose the threats to people and their livelihoods.
Speaker: And we are increasingly reaching and exceeding some of these record temperatures with greater severity.
Speaker: And the share of the global population exposed to extreme heat has actually risen over the last four decades.
Speaker: This is from less than 60% to over 70%.
Speaker: And heat-related deaths have also been increasing alongside this.
Speaker: And on the policy front, what's happening?
Speaker: What sort of developments have we seen to help tackle this issue and break the feedback loop you've described?
Speaker: Yeah, so measures to improve access and the reliability of cooling equipment has been slow.
Speaker: But we have seen this global cooling pledge, which was introduced in December at COP28.
Speaker: And it does appear to be the first internationally coordinated policy to help counter these rising emissions.
Speaker: But we do think more is needed.
Speaker: The pledge does include targets such as emissions and access to sustainable cooling, and also average efficiency of new air conditioners, for example.
Speaker: This has been slow and we do expect better coordination globally, which is key to slowing some of these cooling emissions.
Speaker: Sean?
Speaker: Well, thinking specifically of the refrigeration market, there's policy now...
Speaker: in Europe, in the US to phase out some of the more polluting refrigerants to substitute these with refrigerants that have a so-called lower global warming potential GWP.
Speaker: So we're talking about gases that contribute to the greenhouse effect, is that right?
Speaker: Correct.
Speaker: So, Sean, you mentioned that Europe and the US are leading the way in banning some of these refrigerants.
Speaker: Are other countries likely to follow?
Speaker: We certainly hope so.
Speaker: And I would expect that the global cooling pledge that we've had in COP28 is a signal of international willingness to tighten up on policy.
Speaker: Clearly more room for action then, and soon.
Speaker: Amy and Sean, thank you.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Three other takeaways and things to note in this edition of the Macrobrief.
Speaker: This week saw first quarter GDP from China rising by 5.3% year-on-year, exceeding expectations.
Speaker: The March data, according to our Greater China Economics team, was boosted by accelerations in manufacturing and infrastructure investment.
Speaker: Growth is on track to meet the government's target, but China's policymakers are still expected to roll out more support to sustain the momentum.
Speaker: Plus more clues coming up next week on the health of the global economy with April flash data from purchasing managers' indices on manufacturing and services.
Speaker: And finally, our latest edition of the Currency Outlook has just been published.
Speaker: The team still favours the US dollar on relatively high US yields and slow global growth.
Speaker: In this edition, we also take a closer look at the Japanese yen, the Chinese renminbi, gold and more.
Speaker: For more information on those reports, you can email us at askresearch at hsbc.com.
Speaker: That's all from the Macro Brief this week.
Speaker: Thanks for listening.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
