I read a piece by Goehring & Rozencwajg you may also access the commentary here on supply demand mismatches commodities in general and specifically on some of my favorite topics like OIL, AGRI, URANIUM, COPPER, GOLD
Main Points
On Alternate Energy
Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the University of Manitoba, is the best energy scholar we have ever read, in our opinion. In his Energy Transitions, he notes that historically a new energy source takes between 40–60 years to gain significant market share. The current proposals assume wind and solar will make comparable gains in only 20 years. Ambitious plans often carry ambitious budgets, and the green energy transition is no exception. Using extremely aggressive cost saving assumptions, a widespread move to renewable power is expected to cost $70 tr over 20 years, nearly $50 tr more than if we stayed on the current trajectory. Unfortunately, our research tells us this additional spending will not even come close to generating the expected reduction in global carbon.
Electric vehicles will likely not deliver the necessary carbon reduction either. In Norway, electric vehicle sales have gone from zero to nearly 60% penetration between 2010 and 2019. Despite such a dramatic shift away from oil, Norway’s carbon intensity has declined by 10% compared with 11% in the US where EVs remain less than 2% of all vehicle sales.
Wind and solar are extremely inefficient generators of electricity due to their low energy density and their intermittency. In the coming weeks, we will release a podcast that goes into much greater detail about these shortcomings. In summary, a solar panel likely only dispatches between 12 and 20% of its rated capacity due to the intermittency of sunshine. A wind turbine is somewhat better, but still less than 25%. As a result, excess capacity must be built to generate the necessary electricity. Moreover, the power must be “buffered” by a storage system to smooth out the inherent variability coming from both short-term dislocations (clouds and periods of calm), as well as different patterns between day and night.
On Oil
Regarding demand, we believe 2021 will see a huge rebound. Although the financial press has made little comment, oil consumption in China, India, and now Brazil has made new highs. If our models of emerging market oil demand are correct, 2021 will see global oil demand surpass its pre-COVID highs as the successful roll-out of vaccines gets underway. As we progress through the year, we expect a structural gap between supply and demand will emerge, eventually approaching nearly three million barrels per day, even once all OPEC+ curtailed oil is brought back onto the market. Given that oil prices should recover strongly in 2021 and that oil-related investments remain undervalued, we recommend maximum exposure in this space.
On Copper
China today is pushing to become a leader in generating electricity from renewable sources, an extremely copper intensive exercise. This alone could add several hundred thousand tonnes of incremental copper consumption annually. Also, China, has announced huge investments in their data center and cloud computing industries, both extremely copper and power intensive
On Precious Metals
We continue to believe this gold bull market will be driven by Western investors, as opposed to the 1999–2011 gold bull market, which was driven almost entirely by investors from India and China. The recent slacking of Western demand, as measured by the physical ETFs we follow, gives us more evidence that a potential lengthy period of sideways price action in both gold and silver prices is now taking place.
On Uranium
Despite the bullish outlook (and the Q4 rally), 2020 in many ways, was a frustrating year for uranium investors. Spot prices were strong between January and May, rallying from $24 to $34 per pound before retracing half the advance to end the year at $30.20 per pound on much lower volumes. Term prices rallied from $32 to $36 per pound between December and January and have been stable since on extremely depressed contracted volumes. Concerns over COVID related demand forced many term fuel buyers to the sidelines. US utilities are only 2% uncovered in 2021, but this level jumps to 35% by 2025, suggesting fuel buyers are vulnerable to any rise in price. With the recent speculation of delayed US reactor retirements, we believe we may see fuel buyers finally reenter the term contract market sometime in 2021.
Turning to supply and demand, trends exhibited in 2020 continue to be very bullish. Since nuclear reactors represent baseload capacity—much more so than natural gas plants—and rely on multi-year fueling programs, global demand was less impacted by COVID-19 than other areas in global energy markets. We estimate that global demand was only off 1%—or 1.2-mm pounds. Mine supply on the other hand was greatly impacted by curtailed production at Kazatomprom and the suspension of operations at Cameco’s flagship Cigar Lake due to COVID cases among employees. In total, global mine supply was down 20 mm pounds or 14%. After restarting in September, production at Cigar Lake was yet again suspended in December and remains shut as of today, implying continued tightness into the first months of 2021. Global uranium inventories likely drew in excess of 30 mm pounds in 2020 and we anticipate further draws this year as well.
The coming global agriculture crisis
Over the last four years, global agriculture has sat on a knife’s edge. Extremely strong grain demand, sourced from the developing world, has been met with extremely favorable global growing conditions resulting in bumper crops. Because of favorable weather, global grain markets have been able to accommodate strong demand with little in the way of upside price pressure. However, we believe this is now changing.
”Grain inventories have now been drawn down to levels that could easily slip into dangerous zones if weather in the 2021 northern hemispheric growing season becomes even slightly problematic, which we believe it may. The first signs of drought conditions have already emerged in Brazil, the wheat growing region of the Former Soviet Union, and in the US Midwest. Northeast China’s wheat growing region is currently suffering extremely cold weather causing severe damage to their winter wheat crop.