- war in Ukraine is catalyst on underinvestment in energy and commodities
- China, deglobalization and energy transition driving commodity prices
- mining industry needs record investment soon to meet coming demand
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The Oregon Group was set up to take advantage of a pivotal, once-in-a-lifetime opportunity for investors. Even we have been surprised at how quickly events have turned.
The war in Ukraine and subsequent sanctions on Russia have acted as a catalyst on long-term underinvestment in energy and commodities. Commodities are set to finish the year as the best performing asset class with approx 20% returns ytd on the S&P GSCI.
The global energy transition has well and truly begun. A period of great risk, but also great opportunity.
This year we have focused on the major trends, with a close eye on what this means for specific investments:
1. High energy prices
Soaring energy prices, in particular natural gas, has been one of the biggest shocks to the markets this year, forcing governments across the world to source more secure, cleaner energy.
In our latest report, we focus on the coming 10-year bull market in uranium with prices positively impacted by a large net increase in global nuclear reactors.
We also look at how the global LNG market is being overhauled at record speed and whether, after many false starts, this is now the time for green hydrogen.
The energy crisis is set to become more acute in 2023 — especially in Europe which has spent roughly US$1 trillion on subsidies and bailouts — especially if the war in Ukraine continues and the northern hemisphere experiences more cold weather before March. Unless there is a recession, oil prices will also see significant volatility.
In particular, this will impact European industry and spending power, but also have a knock on effect on other regions. Prices of energy will rise in Asia and exports will be impacted, while the US will see exports of LNG continue to rise, as well as an increase in investment that might otherwise have gone to Europe.
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2. Commodity prices set to go higher
Ford has raised the price of it’s “entry-level” electric vehicle, the F-150 Lightening Pro, by 8% to US$55,974 due to “rising material costs, market factors, and ongoing supply chain constraints.”
It’s just one example of how this year commodity prices have started to rise, especially lithium. Yet for many commodities, investment and markets are still not pricing in the expected rise in demand and tight supply.
Three main factors are driving major moves in commodity prices:
- China and zero-Covid
- deglobalization
- the energy transition
This is happening just as the West is accelerating its efforts to reshore/friendshore critical supply chains exposed during Covid lockdowns, for example, with semiconductors or the US Inflation Reduction Act.
Goldman Sachs anticipates another year of strong returns of approx 43% for commodities in 2023.
We’ve focused on nickel, copper and aluminium, but the trend is clear: the mining industry needs record investment soon if it is to meet the coming demand for clean, secure metals to supply the energy transition.
“The trend is clear: the mining industry needs record investment soon if it is to meet the coming demand for clean, secure metals to supply the energy transition.”
— Anthony Milewski, The Oregon Group
3. Markets are no longer in control
We are bullish on commodities and energy, but this is having a significant impact on the rest of the economy that will likely continue into 2023.
Deglobalization, debt, inflation, interest rate rises, mean sentiment is low. We think with good reason.
We don’t know how or where, as is the nature of Black Swan events, but next year may well see some of the fallout of this year’s dramatic economic events begin to unfold, just as this year has seen governments try to manage the economic impact of Covid.
In our analysis — markets are no longer in control — we suggest how investors can manage this risk and find opportunity.
4. Technology
We have a great belief in technological breakthroughs as a driver of change and investment. The second half of the year brought great interest in Artificial Intelligence (openchat, anyone?), with our focus on the role of AI in predicting climate change and supporting agriculture.
A breakthrough in nuclear fusion power also made headlines, but this is at least over a decade away from commercial viability. In the meantime, we have focused on the new small modular fission nuclear reactor technology that is being rolled out today.
Crypto was a big story this year and we led from the front to say investors should focus, not on crypto-backed carbon credits, but on premium credits from quality projects. This will hold true for next year as well.
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