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Decarbonisation goals require huge commitment to critical metals

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Climate policymaking often seems to be little more than changing a label on a green coloured arrow in a PowerPoint slide from “electric” to “hydrogen”. Of course, oil companies will endorse huge commitments based on superficial briefings. Their investors are encouraging their transformation into cost-plus green energy utilities.

Political debates and investor allocations have been neglecting the long lead times required for the metals and metallurgical techniques needed for electric or hydrogen economies. Any decarbonisation goals must take into account the minimum of seven to 10 years required for developing the new mines we will need.

There is a great deal of attention devoted to the increased efficiency of solar panels and wind turbines. Mine productivity, though, is steadily going down as ore grades decline for critical metals such as copper and nickel. The economic effect of lower ore grades has been offset for the past couple of decades by a few innovations such as much larger mining trucks, but productivity improvements in mining are petering out. There are fewer new, rich metals deposits being discovered, and those that are found tend to be in politically and socially unstable places.

In the coming year, zero net carbon goals will finally be getting the official spending in Europe and America that activists have been demanding. It is time for those to include substantial and timely commitments to mining development.

Copper, nickel, cobalt, chromium and other critical minerals will be required in much larger quantities for decarbonisation, and that means making explicit choices about the regulatory and capital markets support required. In advance. For example, I agree with the environmentalists who believe the proposed giant Pebble copper mine in Alaska poses too much of a threat to the local salmon fishery and fresh water supply.

So we should settle on another source for the copper we will need for electrification to offset the Pebble Mine cancellation. If the alternative copper source is near more water, we have to find ways to somehow safely dispose of dangerous tailings. If the copper is in a desert, we need to bring in large amounts of water, safely, to process the ore.

If the metal grades are low compared with competing mines in politically insecure places, we need to place orders at higher prices than we might pay in an ideal world. And we need to start to develop those mines at least seven years before we need the metal they will produce.

Easy to list. Politically difficult, if not, for the moment, impossible.

For Europeans, the energy transformations will almost certainly require a much larger industrial and social spending commitment to Africa. Creating a coherent policy for this among squeamish social democrats and heavy-handed descendants of colonialists will not be easy.

There is a lot of political support for the hydrogen economy. This enthusiasm has, generally, not been accompanied by an appreciation of how much new, and highly engineered, metal it would require. Hydrogen is not just a non-polluting gas that leaves only water vapour in its wake. It is a hard-to-handle molecule which is not very forgiving of the weaknesses of our legacy metal infrastructure.

At low pressures, hydrogen “embrittles” metals such as steel in ways we are still discovering after a century and a half of research. At higher temperatures and pressures, hydrogen “attacks” steel. The tiny atoms or ions of hydrogen find their way through seals and welds. To keep the hydrogen pipelines pressurised requires several more compressor stages than natural gas. And shifting ground or earthquakes could have more serious effects on that embrittled steel pipeline.

Also, unless lab-scale alternative fuel cell catalysts can be rapidly scaled up to a massive industry, the hydrogen economy will be more dependent on platinum from southern Africa than the oil industry ever was on the Gulf deposits. Even without platinum dependence, we will need to compress several generations’ worth of additions to our metal infrastructure into a few years.

Whether zero net carbon is set for 2035, 2050, or some other ambitious goal, the PowerPoint assumptions that the metal needed will be available when required are not based in reality. If you do not want to be subject to the will and pricing of a handful of mining companies, start preparations now.



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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