Material issues: fossil fuels, metals of the future
Merchandise | 10:25 a.m.
A look at the latest expert opinions and predictions on commodities: fossil fuels; forward-looking raw materials and lithium stocks
-The demand for fossil fuels is expected to exceed the supply
-Australia lacks a major refining / manufacturing presence in forward-looking raw materials
-Industrial metals, a key element of the decarbonization process
-The intensification of the buyback activity puts the lithium sector in the spotlight
By Eva Brocklehurst
The fear of a fall in demand leads to a lack of investment in the supply of fossil fuels and, Shaw and Partners notes that oil demand is expected to return to pre-pandemic levels in 2022. This could, in turn, lead to record fossil fuel prices in the years to come as the world faces an energy crisis.
In a nutshell, the trend towards zero emissions could gain momentum, but the International Energy Agency has indicated that even after 2030, at least US $ 400 million per year of investment will be needed to develop new oils and gas supplies to compensate for declines and aging fields. In BP’s annual energy outlook for 2020, this is estimated to be between US $ 300 million and US $ 800 million / year.
Shaw reiterated an overweight view on the energy sector because oil demand is on the rise, United States shale production has remained stable and OPEC’s spare capacity has declined.
The number of active oil rigs in the United States has increased by 150% since August 2020, but crude production has remained stable over the past 12 months. This stems from a recovery on a weak basis as the number of platforms is currently -55% below highs of 900 at the end of 2018.
There is also the problem of the Drilled But Unfinished Shale (DUC) stock which is a low cost source of supply and has been reduced by -40% since mid-2020. The production of the OPEC alliance has yet recovered 80% of pre-pandemic levels. Shaw believes the reserve capacity forecast could be generous, suspecting members are struggling to ramp up.
Saxo Group analyst Ole Hansen expects the long-term forecasted Brent crude oil price range to rise by around US $ 10, reaching the mid-point of US $ 70 / bbl. The analyst also cites the IEA, which expects global oil demand to rebound 1.6 Mb / d in October and continue to grow until the end of the year.
About –30 million barrels of production were lost during the hurricane season in the United States and the failure to reach a nuclear deal with Iran will increase the pressure.
Raw materials looking to the future
At present, Australia has a relatively minor presence in refining or battery manufacturing processes that use forward-looking raw materials, despite being a producer.
Commodities portrayed as the future in the face of those exposed to megatrends of electrification, batteries, food security, decarbonization and energy transition, says Shaw and Partners, and these opportunities are relatively unfamiliar to Australian investors.
The broker cites an example from CSIRO which shows that if Australia lithium exports in 2017 totaled $ 1.1 billion, which is less than 1% of the global battery value chain. In terms of stocks, as the broker points out, a chemical company typically trades at a much higher multiple than a mining company because it is less cyclical and does not have a depleting resource.
Therefore, the Australian investment market will need to revisit the way these projects are valued as companies bring them to market. There are several emerging players in this field, including Australian potash ((APC)), which is preparing to start its potash sulphate project at Lake Wells in Western Australia. A full ramp-up of production is expected by 2024.
Silex Systems ((SLX)) is also a technology company focused on the commercialization of laser enrichment technology that applies to uranium production and enrichment as well as silicon enrichment. The company is also interested in a unique semiconductor technology, known as cREO, for 5G mobile phone applications.
The Saxo Group recognizes that decarbonization is a necessity but believes that current technologies of wind and solar do not work well enough. Analyst Steen Jakobsen argues that the more decarbonization occurs in the current model, the more âmetallizedâ the economy is.
Supply chains are inelastic due to a lack of support for mine expansion and a lack of capital flowing into âdirtyâ production due to ESG priorities. Inflation is expected to rise, depending on the inability to supply supply relative to the quantity of demand, and negative real rates will mean that the future will be marked by low growth due to low productivity.
The full story is for FNArena subscribers only. To read the full story and take advantage of a two-week free trial of our service REGISTER HERE
If you’ve already had your free trial, why not sign up as a paid subscriber? CLICK HERE