It is very frustrating trying to sift through the supreme confidence and convincing looking data of “the energy transition is happening faster than anyone expects” advocates and reconcile that with the “coal is 6x above long run average prices” crowd.
You’ve probably also seen the compelling-looking graphs of EV adoption in places like the US, Norway, China and others. Now that’s a flow concept; the stock of vehicles is overwhelmingly petrol and diesel powered. But you get the message.
So, we are convinced that the long-run value of hydrocarbons is zero. Demand will fall each year every year. However, we also think that there are good odds that supply drops away, by mostly the same proportion as demand, except for outlier years, in which a plant closes, a mine fully depletes, and for a brief period supply gaps down faster than demand, creating a shortage, even as the long-run trend towards zero continues.
From a portfolio perspective, our strategy is to have some commodity exposure and buy or sell on extremes. For all the detailed analysis, that’s what it boils down to. We’ve got some BHP (below market weight) and some NCM, mainly for the copper that both companies have, and we’ve got AWC (alumina) alongside IPL.
IPL is essentially a gas arbitrage play, with cheaper Australian and US gas inputs relative to European, to produce fertilisers (feed the world) and explosives (to dig up the metals used to electrify everything).
Commodities are selling off in an almighty hurry, given higher rates, the crushing impact of the higher dollar, and the resultant slowdown in global growth, which means commodity producers should overshoot to the downside.
That’s hurt what exposures we have; however, we’ve been underweight the sector and as such aren’t getting hurt overmuch relative to the benchmark.
It also means we should get the chance to buy some, at quite good prices, to maintain this general approach of having some exposure and trying to do it when no one else wants them.
The “when no one else wants them” usually means when they are loss-making. Right now, about 35-40% of the alumina and aluminium supply curve is underwater, and a similar proportion for gold.
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