In Colombia, Coal Is New-Found Priority

The war in Ukraine has jolted Colombia, at least economically. We are struck by news that Bogota is trying to accelerate coal output, as well as identify mining surpluses, to fill at-hand and oversized shortfalls in Europe, including Ukraine. Colombia is one of the world’s top-ten producers of coal. In recent years, the industry there has been on life support, given the global transition to renewable energy.

Colombia should see an economic windfall with unexpected demand for its coal output, alongside better-understood oil-related gains. Prior to the Russian invasion, Colombia was already set to deliver the best economic momentum in Latin America and the Caribbean with anticipated growth of 4.5% in 2022, almost twice the broad regional average of 2.4%, according to the IMF.

There is more at play here than just the coal-and-oil story. We also believe that Colombian growth will surprise on the upside, given the role of technology-related businesses. Consider these two sectors in tandem:

Mining Industry. Coal may represent only about 2% of nationwide output, but it accounts for more than 15% of exports, in line with pre-pandemic data. As with many primary industries, coal has wide-ranging economic influence, including an impact on fiscal policy and labor relations, amplifying the more prominent oil industry. One of the nation’s biggest mines is owned by Swiss-based behemoth Glencore.

Startup Scene. Colombia has a bustling, if not burgeoning, tech scene. As one of countless examples, property-tech firm Neivor just secured a key funding commitment from Tokyo-headquarted SoftBank, a venture-capital giant capable of channeling capital anywhere in the world. Deals here can be overlooked by those who focus on the biggest ecosystems. The consumer-tech unicorn Rappi is based in Bogota.

The net impact of traditional oil-and-coal businesses and dynamic tech-oriented companies both positioned for expansion at the same time should sideline political objections to investing here.

The challenge in traditional market analysis is the political backdrop. Colombia may be set to elect its first-ever left-leaning president in May, aligning with trends elsewhere in Latin America. Former guerilla member Gustavo Petro is now the front-runner; his vice-presidential running mate is the environmentalist Francia Márquez. That could be a deathblow to extractive industries. Or not. Political hyperbole is different from political action. We are willing to let smart development policies play out over time.

From an outsider perspective, we find the election setting to be less problematic for investors than some would argue. A new government seems unlikely to walk away from a fossil-fuel windfall quickly, while the startup scene may be tied more closely to supranational trends favoring venture opportunities. The net impact of traditional oil-and-coal businesses and dynamic tech-oriented companies both positioned for expansion at the same time should sideline political objections to investing here.

Global stock-market investors have already done well in Colombia this year. When paired with a local currency bounce, the US-dollar based return on the MSCI index of the biggest names has been near 30%. The broad-based local index has been less convincing. One reason for the disparity is that Ecopetrol, the oil giant, is of primary interest to international institutional players.

Our enthusiasm aligns with confidence in domestic activity, superseding any election-based undercurrent. As with many nations, Colombia saw a complete collapse in output in 2020, with real economic activity down about 7%. This implosion represents the biggest drop in World Bank data since it started collecting Colombian GDP information in 1961. The celebration of economic recovery this year is likely to be broadcast in both business investment and consumer confidence.

Our Vantage Point: Global interest in Colombian opportunities is focused unnecessarily on the May presidential election. We are more attuned to near-term fundamentals in the mining and startups sectors.

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