What I read this week: Emerging investment trends and the big changes in power sector that no one is talking about
I came across an interesting but lengthy report on emerging investment trends across various asset classes and I decided to to summarise the report itself by picking four trends. Starting with Agriculture, where years of lower crop prices coupled with rising demand and a little help from climatic condition means we are nearing the bottom in agri commodities. The writer also argues the same for Uranium prices where prices collapsed to such a level that it became unviable to mine uranium. The excitement around Electric vehicles and renewable energy ensures that intensity of copper usage in these applications will rise significantly exactly at the time when new supply is dwindling. The last article is the author's observation from his India trip and how power sector and gas reform will be a game changer for India. Indian investors can now participate in these emerging global trends.
I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…
Agriculture: Very Bullish Trends Emerging
The global meteorological growing conditions may be turning less favorable in the coming years. From a climatological perspective, we have just finished three near perfect global growing seasons, and the likelihood of this being repeated is quickly receding, as we are now entering a very weak solar sun-spot cycle. Offsetting these bullish trends, although it is hard to predict what the ultimate impact of a trade war will be for agricultural commodities, it is important to note that both corn and soybean prices have managed to rally strongly despite the Chinese tariff announcements in retaliation to US tariffs announcement. After six years of a long-drawn out bear market, the foundation has been set for a potentially large bull market in grains.
The protein consumption in the emerging market economies is driving up the demand for soybeans. In the US, the additional soybean acres have come at the expense of corn and wheat acres. Surging global soybean demand is clearly having huge effects on planting trends across all global agricultural markets. Corn production last year was down in the US, Europe, Brazil, and Argentina compared with 2016. Reduced corn acreage will ultimately lead to a rapid tightening of global corn markets. Furthermore, China announced a nationwide plan requiring that gasoline contains a 10% ethanol component by 2020 that will have a huge impact on global corn markets. Although China holds extremely large corn inventories, (estimates vary between 80 and 140 mm tonnes), the additional grain demand could quickly draw them down. READ MORE
The Silence Before the Storm in Uranium Markets
The annual uranium demand could double over the next ten to fifteen years, while mine supply is being shuttered today we do not see how this market can avoid substantial deficits going forward. The price has collapsed by as much as 90 per cent, valuations are low, and the fundamentals are in the process of quietly shifting positive.
At today's uranium price, almost half of all the world's mine supply is operating at cash losses. This is unsustainable and over the last few months there have been two large scale supply cut-backs. These supply curtailments alone will cut the global uranium surplus almost entirely. At the same time, thirty-six new reactors that have or will come on-line between 2017 and the end of 2019. As these reactors ramp up to full capacity, they will generate 266 terawatt hours of electricity and will consume 18 mm lbs of uranium, pushing the global uranium market into deficit at some point in the next twelve months. For the first time in nearly a decade, uranium markets are on the verge of slipping into deficit.
In total, there are fifty-seven reactors currently under construction and one hundred and sixty reactors in the final stage before production begins that will add an incredible 100 mm lbs of uranium demand per year. Furthermore, there are an additional three hundred and fifty reactors being proposed (half of which are in China) that increase demand by nearly 190 mm lbs per year. Even with only those reactors that are being constructed or in the final stages of planning, the global uranium market would go from surplus to a nearly 100 mm lbs deficit by 2030 – the largest deficit ever recorded. READ MORE
Copper Market: A Tale of Two Roads & the Impact of Renewables
There are still some challenges in the adoption of the electric vehicle. An electric vehicle is not as efficient as an internal combustion engine. However, the governments' push to increase the use of electric vehicles (which require an intensity of copper consumption) and significant slowing of global mines supply has pushed the copper market into structural deficit. Much higher copper prices will be needed to force this gap closed.
For electric vehicles to accomplish their goal of reducing CO2 emissions, renewable-sourced power will grow from 5 per cent of world electricity output today to 9 per cent by 2025. Generating electricity from renewable sources is massively copper-intensive. Given the various copper intensities and load factor assumptions, renewables could add an incremental 400,000 tonnes per year of entirely "new" copper demand that would accelerate as we progressed into the coming decade. Building out renewable power would, in fact, double annual global copper demand growth. On the supply side, there has been slowdown in global copper mine supply growth and we are quickly running out of high-grade copper deposits. The big slowdown in the expansion and commissioning of new projects, combined with continued acceleration of base depletion, means that the world should see little increase in copper mine supply between 2016 and 2020.
Given the continued push in many markets for the adoption of the electric vehicle, the copper consumption will continue to grow strongly. This metal could be the true winner in the race to build electric cars. READ MORE
The Big Changes No One is Talking About
India is in the process of undertaking massive reforms in its natural gas and power sectors that have the potential to dramatically impact their economy (and future economic growth) going forward. India has announced plans to implement a physical natural gas trading hub with transparent pricing and open access. While many of the details of such a system are yet to be finalized, there are several prerequisites that must be carried out. Today, a domestic gas producer receives a low fixed price despite gas shortages (met with LNG) whereas under the new system the producer would receive a market-based price. Furthermore, opening the pipeline system would allow the producer flexibility in marketing his production. Next, it is hoped the new system will provide greater transparency around both volumes and prices both of which should encourage additional natural gas demand among power providers and industrial end users. Lastly, the unified tariff will ultimately act as a transportation subsidy for those users at the extremities of the network (or a tax for those near the center). This will encourage the development of a pipeline network in the eastern parts of the country that today cannot access enough natural gas.
These reforms are all expected to be passed by the end of 2018 and the government has just issued a request for proposals from international consultants with the aim of selecting a finalized plan in three months' time. While the ultimate impact of these reforms will depend on several factors, the end result is that the worlds' second largest country by population is now in the process of deregulating its natural gas and power market. The impact on India's economic development and growth have the potential to be huge. READ MORE