As many of you will know, I have been preparing a second edition of my book, Commodities: 50 Things You Really Need To Know. The original book, published in 2015 was an introduction for many investors unfamiliar with commodity markets. The second edition builds on that work, and goes into greater depth on lots of different issues – everything from the commodity capital cycle and previous energy transitions, to the difference between thermal and met coal, the dry bulk and tanker markets and onto less well known commodities such as hydrogen and palm oil.
Instead of focusing on the narrative of the personalities performing on the geopolitical stage, Papic contends that it is much better to focus on the wider context in which decisions are made. It’s only there that you can see the constraints that limit the choice of options. For example, political leaders may say they want a certain political outcome, but constraints limit their ability to actually deliver:
Whatever your views are on ‘net-zero’ policies, our job as commodity market investors is to assess the risks and opportunities of any investment, irrespective of our own political or ideological perspectives.
It’s with that introduction that I believe we are close to getting a signal as to how governments will look to temper demand for the metals essential for a net-zero energy transition – copper, lithium, nickel, cobalt, etc.
A fast transition to electric vehicles will of course require enormous amounts of these metals, and given the bottlenecks to production, the impact on prices may be so strong that this acts to dramatically slow the speed at which the net-zero energy transition takes place.
Renewable energy is no free lunch – both wind and solar power require significant amounts of commodities.
Steel is the foundation stone for renewable energy infrastructure. Each new megawatt (MW) of solar power requires between 35-45 tonnes of steel, while each new MW of wind power requires 120-180 tonnes of steel. Other commodities such as aluminium, copper, polysilicon, plastics, etc. are also needed in huge quantities.
According to the IEA, commodities make up about 15% of the investment cost for utility-scale solar PV, and some 8% for onshore wind (steel comprising the majority of the commodity cost), while freight is also a big cost, especially for onshore wind:
According to former geopolitical consultant Marko Papic, the benign geopolitical backdrop of the past 35 years has left investors “woefully underprepared”.
Ever since Mikhail Gorbachev’s 1985 “Leningrad speech”, capitalism became the only game in town. Geopolitics has continued to play a role, but only really in the background, as US hegemony provided a dividend in the form of globalisation, an expansion in the global labour supply and free-market policies.
That changed after the Great Financial Crisis of 2008, as the world has moved towards a multi-polar world in which there is no single centre of power. The book, Geopolitical Alpha: An Investment Framework For Predicting The Future is Papic’s framework for helping people understand and prepare for the geopolitical power shifts underway.
One of the most important, yet least appreciated drivers of the next commodity super-cycle lost momentum this week.
This week India’s prime minister Narendra Modi announced that the government will withdraw all three agriculture-related market reforms introduced in September 2020.
In his address to the nation, the prime minister said: “The objective of the three farm laws was that the farmers of the country, especially small farmers should be strengthened, they should get the right price for their produce and maximum options to sell the produce.”