Materials Risk

Fertilisers play an essential role in crop development.

They have been the single most important catalyst in improving crop yields over the past 40-50 years, enabling farmers to produce enough food to support global population growth.

As this article shows, fertilisers are highly energy intensive requiring huge amounts of fossil fuels. Higher energy prices directly feed into an increase in fertiliser prices. Fertilisers make up a significant share of the costs involved with agriculture, and so any increase in cost is likely to be passed onto the next stage in the supply chain and eventually onto the end consumer. read more

One thing that is not in short supply are stories about shortages.

The BBC leads with “Shortage problem: What’s the UK running low on and why?”, meanwhile The New Yorker has, “The Supply-Chain Mystery: Why, more than a year and a half into the pandemic, do strange shortages keep popping up in so many corners of American life?”, the Nikkei covers the angle in a different way, “Japan’s COVID emergency is over. Labor and chip shortages are not”, and last but not least of this small sample selection, The New York Time goes with “The World Is Still Short of Everything. Get Used to It“. Meanwhile, The Economist and Barron’s magazines both lead with a major feature on shortages. read more

Amidst the furore sparked by high coal and gas prices it was easy to overlook another ‘energy’ related market that has also seen prices hit record levels. Lithium carbonate prices reached a new all-time high in the second half of September on the back of limited supply and high and sustained lithium-ion battery demand in China. Benchmark’s EXW China (Battery) grade of lithium carbonate rose to $24,800 per tonne in the two weeks to 30 September 2021 – an increase of over 200% since the start of the year. The last time prices were at this level was March 2018 when prices were assessed at $24,750/tonne. read more

The recent spike in energy prices and concerns over shortages is finally starting to highlight the difficult choices that governments face in trying to accelerate the zero carbon energy transition and meet their net zero targets. In this article I show some of the short and long term trade offs that they will face and whether recent events will serve to accelerate the zero carbon transition, or put the brakes on it.

In the short term high natural gas prices is likely to mean that more thermal coal – and to a lesser extent more fuel oil – will need to be burnt to generate electricity. Both fuels are significantly worse for the environment than burning natural gas. This is already happening, and its likely to get worse. Coal fired generation has made a comeback in Europe this year as gas inventories dwindle and high prices incentivise the burning of coal. As we head into winter Europe’s utilities demand for coal is set to grow in order to avoid shortages. Earlier in September, Sweden’s oil fired power station started generating electricity in response to high power prices. The facility is normally only called upon during rare periods during the winter when it is especially cold. read more

As the impact of high energy prices have hit the frontpages, speculators have caught the ire of policymakers looking for a scapegoat. In Europe attention has focused on the role that speculators in the EU’s carbon market. The Spanish government has issued a protest to the European Commission arguing that current “[electricity] price levels and volatility are politically unsustainable”, calling the current crisis, “a threat to carbon cutting initiatives.” In the document they call on the European Commission to adopt measures to prevent financial speculation in its carbon market, the EU Emissions Trading Scheme (EU ETS): read more

In early May I highlighted some of the potential China related risks facing commodity investors. One of the stories that was not on many investors radar was the Winter Olympics – due to be held in Beijing in February 2022. To see why this is important you only need to look back at the last time China staged the Summer Olympics in August 2008.

A construction boom ahead of the games plus precautionary imports of vital commodities (for example, diesel to avoid the risk of power shortages) were major factors behind the final surge in the late 2000’s commodity super-cycle. read more