Commodities | Oct 15 2021
A glance through the latest expert views and predictions about commodities: fossil fuels; future-facing commodities and lithium equities
-Demand for fossil fuels is expected to outstrip supply
-Australia lacks a major presence in refining/manufacturing of future-facing commodities
-Industrial metals a key part of the decarbonisation process
-Heightened takeover activity puts the spotlight on the lithium sector
By Eva Brocklehurst
Fear that demand will fall away is leading to lack of investment in the supply of fossil fuels and, Shaw and Partners notes global oil demand is expected to return to pre-pandemic levels in 2022. This could, in turn, lead to all-time high fossil fuel prices in the years ahead as the world confronts an energy crisis.
In a nutshell, a push towards zero emissions may be gaining momentum yet the International Energy Agency has indicated that even after 2030, at least US$400m per year of investment will be required to develop new oil and gas supplies to offset the declines and ageing fields. In BP's 2020 annual energy outlook this is estimated at US$300-800m/year.
Shaw has reiterated an Overweight view on the energy sector because oil demand is rising, US shale production has been flat and spare capacity at OPEC has reduced.
The US active oil rig count is up 150% since August 2020 yet crude production has been flat for the past 12 months. This stems from a recovery off a low base, as the rig count is currently -55% below the highs of 900 in late 2018.
There is also the issue of drilled but uncompleted (DUC) shale inventory which is a source of low-cost supply and has been drawn down -40% since mid 2020. OPEC alliance production has made a 80% recovery to pre-pandemic levels yet Shaw believes forecasts for spare capacity could be generous, suspecting members are finding it difficult to ramp up.
Saxo Group analyst Ole Hansen expects the long term forecast Brent crude oil price range will shift up by around US$10, to the mid US$70s/bbl. The analyst also cites the IEA, which expects global oil demand to rebound by 1.6mb/d in October and continue to grow into the end of the year.
Around -30m barrels of production was lost during the US hurricane season and failure to reach a nuclear deal with Iran will add pressure.
Currently, Australia has relatively minor presence in the refining or battery manufacturing processes that use future-facing commodities, despite being a producer.
Commodities described as future facing a those exposed to the megatrends of electrification, batteries, food security, decarbonisation and energy transition, Shaw and Partners explains, and these opportunities are relatively unfamiliar to Australian investors.
The broker cites an example from the CSIRO which shows that while Australia's lithium exports in 2017 totalled $1.1bn this represented less than 1% of the global battery value chain. In terms of stocks, as the broker points out, a chemicals business typically trades on a much higher multiple than a mining business, as it is less cyclical and does not have a depleting resource.
Hence, the Australian investment market will need to review the way these projects are valued as companies bring them to market. There are several emerging players in this sphere including Australian Potash ((APC)), which is preparing to start its Lake Wells sulphate of potash project in Western Australia. A full production ramp up is expected by 2024.
Silex Systems ((SLX)) is also a technology company focused on commercialising laser enrichment technology that applies to uranium production and enrichment as well as silicon enrichment. The company has an interest in a unique semiconductor technology as well, known as cREO, for 5G mobile handset applications.
Saxo Group acknowledges decarbonisation is a necessity but believes the current technologies of wind and solar do not perform well enough. The analyst, Steen Jakobsen, asserts the more decarbonisation occurs under the present model the more the economy is "metallised".
Supply chains are inelastic resulting from a lack of support for mine expansion and lack of capital flowing into the "dirty" production side because of ESG priorities. Inflation is expected to rise, a function of the inability to deliver supply relative to the quantity of demand, and negative real rates will mean the future is about low growth through low productivity.