Summary

Vanda Insights

Vandana’s macro analysis of the oil markets, looking beyond Covid, began by discussing the historical price of crude; with four identified inflection points since Western reopening (with the most recent in May 2021) as well as why crude oil has quadrupled since April 2020. This can be explained by the unprecedented deep output cut by OPEC/non-OPEC along with caution easing, the depletion of inventories and the bullish euphoria surrounding US reopening, with new Covid playbooks to avoid lockdowns. Vandana went on to discuss the market impact of OPEC+, explaining that the group's interest in treading cautiously is demonstrated by the gradual tapering of production cuts. Furthermore, regaining market share, avoiding inflation, and avoiding a shale revival will necessitate a balancing act. Finally, unlike previous price softenings such as 2016/17 – which saw a sharp recovery – US shale is slowly recovering after the 2020 blow. Importantly shale has an inventory advantage due to DUCs (drilled but uncompleted wells) that will facilitate this comeback. Vandana’s outlook, while constructive in the short-term (Brent ~$70-75/barrel in next 6 months) with demand recovering and OPEC+ controlling supply tightly, it is important to note that economic recovery will be uneven across time and geography. Long-term uncertainties are high; climate pressure, a drop in upstream spending, and geopolitical tensions and fluxes are not likely conducive to global recovery.

Queen Anne’s Gate Capital

Kathleen focused on dispelling commodity myths surrounding supply, oil demand and feedstock. Firstly, Kathleen opposes any concept of a commodity super cycle, arguing instead in favour of traditional cyclicality. While demand shifts from EVs and stimulus may appear to indicate otherwise, this is not the case. Producers and consumers change their behaviour when prices change; producers are attempting to increase output and consumers are substituting. As a result, Kathleen is bullish on the oil market, whereas industrial metals and grains are thought to have topped. Secondly, there is no OPEC breakup. Although clear in light of recent events, this is based on Kathleen's experience working with the Saudi energy ministry. OPEC is committed to maintaining a balanced market, and supply constraints will only gradually increase in September in the five countries that can produce above their quotas. Kathleen also forecasts an increase in energy demand due to overt covid habits, which will result in record gasoline prices. Kathleen also mentioned that OPEC's pricing stance has shifted. Although the old OPEC would be concerned if Brent reached $84, Saudi Arabia's new oil minister wants higher prices. When prices break $80, as Kathleen predicts this summer, this will lead to less responsiveness. The final misconception discussed was EVs, which have become unattractive due to unclean sourcing. Instead, the hydrogen market is a more attractive solution which will increase long term demand for natural gas.

CHR Metals

Despite a potentially pessimistic title, the industrial production outlook is extremely positive. Even though business surveys predict strong future growth, data collected by CHR Metals shows that sequential growth is no longer exceptional and that normal levels are returning. Nevertheless, there is still space for expansion, with an increase of 8% expected this year, compared to a 5.3% contraction last year. However, most of the growth required to attain this goal has already occurred, especially in China. Pent-up demand created by Covid is expected to shift spending away from industrial products. While China's exports were able to keep up with demand while other nations halted during the pandemic, this is likely to contract going forward, thus moderating overall growth. Importantly, a continued and long-term fiscal stimulus is required to achieve a sustained recovery and maintain commodity demand for the purpose of completing planned infrastructure projects. By comparing economic recoveries from the GFC and Covid geographically, it is clear that expanding fiscal spending to recover industrial production rather than relying on central bank engineering and monetary policy is important in the wake of the pandemic. The GFC showed that low interest rates and monetary stimulus is insufficient to increase industrial production.

CPM Group

Electric vehicles may dominate the automotive industry during the next 10-20 years, but they are not the future. Instead, Jeffrey believes in new energy vehicles – more specifically hydrogen engines rather than fuel cells. In terms of costs, an ICE engine is $3,000, a fuel stack is $30,000 and a hydrogen engine only $1,500. While fuel cells may be more applicable to fleets of vehicles, hydrogen engines are more attractive than fuel cell counterparts for consumers due to reduced capital and operating costs. In R&D and lithium-ion battery manufacturing, there has been a definite trend away from cobalt and toward manganese. Cobalt is uneconomical and will be reduced by a further 50% in the next years. While battery demand for lithium, manganese and cobalt will shift, there is persistent demand for other commodities such as nickel, copper, PGMs, hydrogen and uranium. Too many are promoting lithium/cobalt or another rare earth metal as the future of EVs, and auto executives are pushing a transition to all-electric fleets by 2030-2035. However, due to uncertainties such as the ability of electrical supply to satisfy demand and the stability of grids in many nations, these aspirations lack support from engineering R&D groups. The market penetration of EVs is expected to be low (14-34% by 2030). Instead, petroleum will persist, with two-thirds of vehicles still using it by 2050. Moreover, according to the IEA's estimates for this year, oil, natural gas, and coal will be the dominant sources of energy until at least 2040.

Global Mining Research

GMR's presentation started by examining non-gold sector's performance since the Covid-19 pandemic's peak, where free cashflow yields are very high and multiples are low. Commodity prices have risen as a result, meaning that their stocks have experienced significant gains. Iron ores, nickels, and diversifies have all come close to matching, and in the case of the diversifies, even outperformed the performance of FANGS, which had been recommended by sources like the FT and WSJ. GMR discussed seven global diversified, including their recommendations for which stocks they see opportunity in. We again see with the diversified miners, compression of the multiples and a lack of belief in the longevity of any of the commodity prices. GMR reviewed seven global diversified miners and equities that present opportunity. Compression of the multiples and a lack of trust in the long-term viability of any of the commodity’s prices may be seen once again in the diversified miners. While iron ore companies show spectacular two-year cash flow yields, GMR does not currently push this market due to record high share prices. Due to the 8-11 year time lag between price signals and supply, GMR expects a spike in mined copper supply in 2028. In the short term, however, higher tax rates in Chile and Peru are dissuading investment. Therefore, GMR has withdrawn some recommendations in this industry, apart from Quantum and Lundin. Finally, due to their interest in the trends seen with Nickel companies, GMR intensively covers the nickel industry. The influx of money from China into Indonesia is intriguing, as nickel pig irons become higher grade commodities.

Commodity Intelligence

Mark's presentation on ESG and Supply Chains began with an overview of the IEA's net zero prediction and projection for the end of oil demand by 2050. While the Saudi energy minister dismissed the idea as a ‘La La Land Sequel’, Mark assessed this roadmap by addressing renewable energy. More specially, floating solar, which has been hailed as the "end game" due to low property prices and rapid construction. Examples of infrastructure projects utilising this concept including South Korea, California, Singapore and Norway. Although this technology has the potential to replace all coal plants in the world within nine years, there are certain challenges associated with the increased demand for floating solar; polysilicon costs have tripled, and the surplus energy produced cannot be stored. The IEA forecasts OPEC will have a 52% market share and will force oil prices higher. Historically private sector events have been responsible for causing oil prices to collapse. Mark explained that CapEx discipline does not work in the oil sector due to the associated cost curve. Instead, ESG provides a better alternative as it affects everyone on this cost curve in the same way. China has shown this through being forced to change by ESG requirements – however, Mark believes that the market does not fully understand China’s policy. Finally, while ESG is good for commodities, crypto and blockchain technology allows for the digitalisation of the supply chain. Therefore, the race for ESG verification and traceability provides a bullish market for commodities.

Janus Analysis

Gaius forecasts significant price appreciation for the non-recyclable fertiliser industry while avoiding strong price fluctuations seen in other commodities that are linked to the business cycle. Fertilisers also offers an opportunity to invest in global growth and development. Potash and phosphate consumption is reaching production constraints on account of growing demand from an increasing population and decreasing arable land. Moreover, the rise of the urban middle class and dietary changes will increase protein consumption per capita – as already seen by China’s 130% increase. Potash is used globally, namely in Brazil, Indonesia, China and US for a variety of crops whilst phosphate is biological ‘bottleneck’. 60% of the oligopolistic potash market is supplied by Cantopex and Belarussian Potash Company and sees 80% of production exported. Market growth, driven by Africa and South/West Asia, is forecast to double every 23 years. Potash pricing will potentially double in the near term and reach $245 a ton in the long term. In contrast, the perfect phosphate market is mostly produced in Morocco and Western Sahara. Smaller producers globally reduce exports to approximately 35%, although China’s production rate long term is unsustainable. This higher-grade deposit depletion may force the market to adopt a more oligopolistic structure. Pricing analysis, with adjusted costs, suggests a 50% upside for long term phosphate-rock prices. Gaius’ recommendations include higher-cost producers Nutrien and Mosaic, given that revenues per unit sold will provide greater leverage to upside profitability and capital appreciation.

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