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Market Expectations

"The whole world is simply nothing more than a flow chart for capital." - Paul Tudor Jones

Geopolitics and Commodities

After a year in his seat, CIA Director William Burns gave a speech to the students of Georgia Tech University this week. In his talk, he mentioned the fading of trust in our institutions, the recent declassifying of intelligence ahead of the Russian invasion of Ukraine and the role of the CIA at large. Most importantly, though, I would like to point to Mr. Burns' commentary on China and why global power dynamics are at a very critical conjunction:
"The People's Republic of China is intent on building the capabilities to bully its neighbors, replace the United States as the preeminent power in the Indo Pacific & chip away, with other authoritarians, at the rules-based international order. As an intelligence service, we have never had to deal with an adversary with more reach in more domains."

The CIA director's speech comes at a time where the world transitions to electric, reforms its power grids and has underinvested in hydrocarbons for 6-7 years. The fact that real assets mean economic and political leverage lead the western hemisphere stuck in between a rock and a hard place.

The same message that echoes tough trade-offs is amplified by statements such as the one from Italian's PM, Mario Draghi: "Do you prefer peace or the air conditioning on?" 

Last week, I mentioned how we might be set up for a lose-lose scenario on the monetary front as the economy is either going to slow by itself or the FOMC will make it slow. This week, we turn to a few commodity markets and what will drive them going forward.
 

Commodity Overview

In past writings, we established a view that the world is moving towards multipolarity where different nations will have various degrees of influence on allies. This is diametrically opposed to the efficiency gains and technological progress the world's enjoyed for decades and allowed us to consume goods at ever cheaper prices.

All these goods global economies run on have one thing in common: real commodities are a factor of production. 

Through the lens of multipolarity, countries will define their own strategic priorities and secure reserves to foster leadership structures in their own nations. An increase in reserves and a decrease in cooperation across manufacturing lines - all amidst an attempt to weigh energy security with energy emissions - makes for a complex cocktail. 

If we are right about multipolarity, then the next question is: what investment themes will benefit? For one, developing nations around the globe will increasingly turn to their own strategic interests and assess how partnerships with either side of the international order will advance their own mission. A mission of urbanization, increased prosperity and whatever it takes for local leaders to retain power. 

Urban Population Share Forecasts, By Region

 

Source: World Bank

Along with urbanization in developing economies comes an attempt to commit to Net-Zero in the west while running short on critical commodities all at the same time.

Now, it will be interesting whether multipolarity will revolve around setting debt-traps or whether developing economies will be built up for two-way commerce.

In the scheme of things, if China's grand strategy is the establishment of an economic trade zone fairly independent of the U.S., it would require stability -- we shall see. 

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Transition to Higher Energy and Metal Demand

Along with global urbanization comes a step-function increase in both energy and metal demand. As people get lifted out of poverty, they consume more of everything.

Per Capita Energy and Metal Consumption | Advanced Economies - Emerging Markets and Developing Economies

Source: World Bank

In order to establish some quantitative measures around what are substantial developments, let's look at a few commodities.

 

Natural Gas

• Credit Suisse projects a potential 100 million tons/year shortfall in LNG supply by 2025 (Shell estimated global LNG demand at 380 million tons in 2021.)
• Germany's heavy, energy-intensive industry relies on the premise that energy supply is ample and cheap. The inability to ramp up imports will put a substantial economic burden on Germany and the European Union as a whole.
• Japan's LNG stockpiles are running below the 5 year average as the country supports Europe's shortfall. The inability to fill up storage levels not only in Japan but across the western hemisphere could lead to a prolonged energy security problem until export terminals and import facilities are built.
• China proves as the incremental buyer of LNG while other firms are avoiding Russian cargoes.
• 95% of Singapore's electricity production depends on expensive nat. gas imports -- energy prices putting a burden on those imports may see shipping rates increase as the island needs to finance its increased expenses (point of leverage with 20% of the world's transshipments passing through the Port of Singapore; world's second busiest container port).
• According to Freeport LNG CEO, 70% of Freeport's gas went to Europe this past winter as Asia was well stocked (traditionally closer to 25-30%.)
• The competitive case between Asia and Europe for LNG supplies is clearly illustrated by tankers turning around in the Pacific to arbitrage the spread in Europe -- since the start of the war in Ukraine more than 20 million tons of export contracts were signed with potential U.S. LNG export projects.

Natural Gas Supply - Demand Gap

Source: McKinsey

Copper

Copper is irreplacable in the energy transition and has been a proxy for China's activity for a long time. Despite 357 million Chinese in lockdown, copper is staying elevated.

• The CEO of Teck Resources stated a potential 4.5 million supply-demand deficit by 2030
  • Renewable energy systems to require 12 times more copper than traditional

Source: Critical Resource

• Former Glencore CEO, Ivan Glasenberg:
  • By 2050, the world needs to produce 2.5x as much energy
  • The world consumes 30 million tons of copper annually today; by 2050, the world has to produce 60 million tons. 
  • Copper supply has to grow by 1 million tons/year (historically copper supply was increased by 500k tons/year.)
  • Glencore CEO thinks increasing copper supply by this much is going to be extremely difficult.

Copper Price

Source: Bloomberg
 

Coal

Even more so than hydrocarbons, coal has seen a massive supply-demand mismatch as emerging markets continue to see coal as the cheapest energy alternative. In fact, as we speak, Europe has also ramped up coal power plants.

• As former Glencore CEO Ivan Glasenberg noted:
  • "The world has said: we wanna reduce thermal coal production. Mining companies are not investing. At Glencore, we said we will follow the Paris agreement  (40% reduction by 2035) and run down most coal mines by 2050."
  • No new supply in the thermal coal market while demand is still there.
• India's Economic Survey 2021-2022 reveals coal demand to increase to 1.3-1.5 billion tonnes by 2030 (up from 955.26 million tonnes; 2019-2020)

Australia and South Africa Coal Prices

Source: Bloomberg

 

Food and Agriculture

World Bank estimates warn that for each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide. - World Bank

UN Food Price Index

Source: Bloomberg

Food as a strategic asset will be key to monitor not only within the context of prices but also geostrategic partnerships to resolve and lift suffering off of those who will be short on food.

 

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Economic Calendar

U.S.

Data Release Times (E.T.)

 

China

Data Release Times (E.T.)

 

Eurozone (decreasing importance of events from top - bottom)

Data Release Times (E.T.)

 

Food for Thought

Metal Producing Countries

Source: IMF

 

Commodity Cycle Amplitudes

Source: World Bank

 

Earnings

Lockheed Margin (LMT) reporting before the open on Tuesday: 

• Consensus: EPS est. $6.22; Revenue est. $15.61bn

Commentary on the following will be monitored:

• Geopolitical tensions and military build-ups around the world
• Geostrategic partnerships between the U.S. and its allies
• Ukraine-Russia as well as commentary on the U.S. pivot to the South China Sea

 

Netflix (NFLX) reporting after the close on Tuesday:

• Consensus: EPS est. $2.92; Revenue est. $7.93bn

 Commentary on the following will be monitored:

• Subscription growth in different geographics
  • Particularly on the international side with rampant spending on content
• Content spend and its long-term trajectory
• Streaming industry (oligopoly dynamics and the future of competition)
• The path of video games entertainment at large

 

ASML Holdings (ASML) reporting before the open on Wednesday:

• Consensus: EPS est. $1.96; Revenue est. $3.88bn

 Commentary on the following will be monitored:

• The state of the chip industry within the framework of supply chain constraints
• Taiwan Semiconductor and potential dependencies
• The semiconductor inventory cycle

 

Tesla (TSLA) reporting after the close on Wednesday:

• Consensus: EPS est. $2.27; Revenue est. $15.67bn

 Commentary on the following will be monitored:

• Car deliveries and outlook on production
• Supply chain visibility (additional supplier contracts)
• Giga Berlin and plans for incremental production capacity

 

Additional Earnings: Freeport McMoRan (FCX) reporting Thursday; Schlumberger (SLB) and Newmont Mining (NEM) reporting Friday

 

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Agriculture Copper Commodities Natural Gas Coal Geopolitics

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