Australian utilities and agriculture are among the most exposed sectors if El Niño emerges. And as sea-surface temperatures in the central tropical Pacific continue to warm, the country's Bureau of Meteorology (BOM) says El Niño is becoming more likely.
In a statement, Fitch Ratings also noted that hotter and drier conditions would increase water stress, weaken agricultural output, raise peak electricity demand and heighten bushfire risk, although impacts would vary by region.
Utilities
According to Fitch Ratings, utilities “will be directly exposed”, as the drier conditions associated with El Niño can reduce water storage levels and inflows, which may weaken revenue and increase water utilities’ operating expenditure through greater use of desalination plants and chemical treatment.
“Drought-response measures, such as water restrictions and drought pricing, that are typically triggered as dam levels fall under regulators’ demand volatility adjustment mechanisms, will help support cash flow,” said Fitch Ratings.
“Hotter weather could also increase electricity demand, putting pressure on spot prices and grid stability while raising bushfire-related risks for transmission and distribution assets.”
Energy
For energy retailers, a combination of higher spot prices and unplanned outages could translate to short-term earnings volatility, especially those with retail loads exceeding their owned or contracted generation output and when hedge cover is insufficient, said Fitch Ratings.
“However, for regulated utilities, regulatory frameworks in place will limit most of the credit impact through revenue cost recovery in subsequent years,” Fitch Ratings said.
Agriculture
“Agriculture has fewer protections against prolonged drought conditions, and is likely to be among the most affected sectors, as El Niño typically brings lower rainfall, weaker pasture growth, lower crop yields and irrigation stress,” said Fitch Ratings.
“Farm output could fall, pressuring food supply chains and increasing food price volatility.”
Australian wheat and barley production volumes fell by an average 28% and 18%, respectively, in El Niño years, according to the Australian Bureau of Agricultural and Resource Economics and Sciences and BOM.
According to Fitch Ratings, El Niño would also add complexity to the agricultural sector’s exposure to the Middle East conflict amid volatile energy and fertiliser costs.
“Weaker planting activity may weigh on volumes and revenue for agrochemical producers, although demand for some drought-management products could remain relatively stable,” Fitch Ratings said.
“Lower agricultural production could reduce export volumes, but ports and logistics operators are unlikely to see widespread disruption, with heat, bushfires and drought more likely to create localised rather than sector-wide impacts.”