ANZ Expert: Energy Transition to See "Winners and Losers" as Commodity Markets Rise

Commodity markets have been on the rise over the past year, with everything from base metals and battery metals to uranium seeing prices increase.

“Commodity markets are very tight due to a combination of strong demand and ongoing supply-side issues,” Daniel Hynes of ANZ told the audience at the RIU Explorers Conference in Fremantle, Western Australia, last week. “Central to this is the energy transition, which will upend the sector for the foreseeable future.”

A key catalyst for the commodity markets will be what happens in China; growth started to subside during 2021, leading officials to put measures in place to stabilize momentum.

“We can already start to see that in the credit impulse, where we're seeing an uptick over the past few months, but officials are now looking to further that growth support with measures, particularly around the infrastructure side, over the coming year,” Hynes said. “So this obviously should be very positive for commodity markets.”

Another big-picture factor is the increasing impact of climate change policies, particularly in energy markets.

“Investors have been really driving this change by pushing company boards and sectors to invest more in renewable energies ... we are seeing a subsequent fall away in investment in fossil fuels,” Hynes said.

The impact of the energy transition will be felt differently depending on the region and whether fossil fuels are an essential component of the energy mix — North America will not suffer bottlenecks in the same way as Asia.

Speaking on supply-side challenges brought by the energy transition, increasing demand for electricity has already had an effect with shortages hitting Europe and China, forcing closures in heavy industry, Hynes pointed out.

“Compounding this has been the uncertainty around weather, which has really impacted renewable energy power generation,” he added. “This just magnifies the issues that renewable power generation will have over the longer term to be a provider of reliable energy.”

The energy transition will cause a lot of hurdles in the short term, the commodity strategist at ANZ said. The aluminium and steel sectors have already experienced challenges in the past 12 months.

“With European power prices really surging more than six fold over the past couple of years, we've already started to see European smelters close along the operations as a result,” Hynes said. “But it's even deeper than that; constraints on aluminium supply are being impacted by the emissions of the industry.”

But the key issues are going to be faced by the oil and gas sectors, according to Hynes, with a lack of investment resulting in a struggle to substantially increase output.

“Normally, the market would expect to see more flexible, nimble producers respond as a consequence of that, but US oil shale companies seem to be a lot more subdued and cautious around the output for oil supply,” he explained. “In fact, we've seen a reduction in capital expenditure as a result of that, where companies are now more focused on returns rather than growth at all costs.”

In the gas sector, Russia is a key player, but it has also been reducing its supplies into Europe, both due to a rise in domestic demand and geopolitical issues.

“The threats of further disruptions with Russia ... are certainly going to be a significant issue for energy markets, which are already suffering from relatively tight supplies,” Hynes said.

Moving away from supply-side concerns, the ANZ expert noted that the demand side of the energy transition story will bring opportunities for a number of diverse resources.

“Some of key metals — such as copper, nickel, aluminum — are going to have a very strong part to play in that energy transition, particularly from the electric vehicle sector, and certainly the low-carbon power generation,” Hynes told listeners at the RIU event. “That is really going to drive demand for a lot of these metals, quite significantly, even though the levels of that output are still relatively low.”

As a consequence of this strong demand and the supply-side issues, inventories are hitting record lows across the board, from metals to the energy sector.

“Overall, it is a fairly positive backdrop for commodity markets ... so we do expect to see a fairly broad-based rally in commodity markets over the next 12 months and potentially much longer than that,” Hynes said.

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Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.