David Fuller and Eoin Treacy's Comment of the Day
Category - General

    'The World Changed 12 months ago'

    Thanks to a subscriber for this summary of an interview with Zoltan Pozar. Here is a section: 

    Rearming, Reshoring, Energy transition.
    Taken in combination examples of these would be:
    • Building factories for batteries, Chips, subsidizing energy transitions,
    • Military expansion in Japan, Europe etc, inventory mgt increases. Onshoring of factories etc
    • All of these amounts are government money. It will be matched by company money as well

    This will cause Two Outcomes
    1. Commodity prices will remain high from constrained supply and increased expenditures
    2. We are at the beginning of a domestic infrastructure investment renaissance

    Notable: ‘The investment portion will be quite powerful, perhaps to the point of us not even having a recession’
    The 3 Gov’t themes will push counter the recessionary forces that undoubtedly accompany rate hike regimes. Consumption will get crushed. But investment will grow.

    All these things are being done with a sense of urgency as (economic) national security and sovereignty is a big factor in each.. we need to do it yesterday

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    The Age of Energy Insecurity

    Thanks to a subscriber for this article from Foreign Affairs. Here is a section:

    Even with redoubled efforts to produce more clean energy at home, the United States and others will still depend on China for critical minerals and other clean energy components and technologies for years to come, creating vulnerabilities to Chinese-induced shocks. For instance, in recent months, China has suggested that it may restrict the export of solar energy technologies, materials, and know-how as a response to restrictions that Washington imposed last year on the export of high-end semiconductors and machinery to China. If Beijing were to follow through on this threat or curtail the export of critical minerals or advanced batteries to major economies (just as it cut off rare earth supplies to Japan in the early 2010s), large segments of the clean energy economy could suffer setbacks.

    Traditional energy heavyweights are also recalibrating their positions in response to the changing geopolitical landscape in ways that increase energy security risks. Saudi Arabia, for instance, now sees its global stance differently than it did in the decades that followed the famous “oil for security” bargain struck by U.S. President Franklin Roosevelt and Saudi King Abdulaziz ibn Saud on Valentine’s Day in 1945. Riyadh is now far less concerned with accommodating Washington’s requests, overt or implied, to supply oil markets in ways consistent with U.S. interests. In the face of a perceived or real decrease in U.S. strategic commitment to the Middle East, Riyadh has concluded it must tend to other relationships—especially its links to China, the single largest customer for its oil. The kingdom’s acceptance of China as a guarantor of the recent Iranian-Saudi rapprochement bolsters Beijing’s role in the region and its global status. Relations with Moscow have also become particularly important to Saudi Arabia. Regardless of the invasion of Ukraine, the Saudi government believes that Russia remains an essential economic partner and collaborator in managing oil-market volatility. It will therefore be extremely reluctant to take positions that pit the Saudi leadership against Putin.

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    Re-Emerging Equities

    Thanks to a subscriber for this report from AQR which may be of interest. Here is a section: 

    However, lower risk in emerging markets isn’t just a China story. Fundamentals have also improved more broadly. Over the past 20 years, per capita GDP in emerging markets has roughly doubled as a share of developed markets (Exhibit 5, left side). Measures of external vulnerabilities have also improved from their periods of peak fragility in the 1980s and 1990s. Current account balances in emerging markets are now positive in aggregate, and measures of external debt sustainability (e.g., external debt as a percentage of exports) look much healthier (Exhibit 5, right side).

    Bottom line: there are many reasons to believe that the relatively attractive valuations found in emerging markets represent a 5-10 year opportunity. In other words, the current expected premium is likely due to these markets being relatively underpriced, as opposed to representing compensation for assuming meaningfully greater portfolio risk.

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    Perseus Maintains 2H Gold Production Forecast

    This note from Bloomberg may be of interest. Here is a section: 

    Perseus reaffirmed its gold production forecast for the second half-year.

    SECOND HALF FORECAST
    Still sees gold production 230,000 to 260,000 oz
    Still sees all-in sustaining costs/oz $1,000 to $1,200

    YEAR FORECAST|
    Still sees gold production 498,370 to 528,370 oz
    Still sees all-in sustaining costs/oz $1,000 to $1,100

    THIRD QUARTER RESULTS
    Gold production 130,275 oz, -0.5% q/q
    All-in sustaining costs/oz $971, -1.2% q/q
    Gold sales volume 135,111 oz, -33% q/q

    COMMENTARY AND CONTEXT
    Perseus’s strong operating performance is forecast to continue in the June quarter with both gold production and cost guidance for 1H and FY expected to be achieved strong quarterly cashflows further strengthened Perseus’s financial position with available cash and bullion of $471 million, zero debt, net cash and bullion balance increased by $66 million at quarter end
    Development activities continued at Meyas Sand Gold Project with confirmatory and sterilisation drilling, Front-End Engineering and Design and site preparation, ahead of a possible FID during 2H 2023
    Organic growth activities including Mineral Resource drill outs and feasibility studies for MSGP and Yaouré’s CMA Underground Project progressed on schedule; Results due in Sept. qtr

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    Lessons from Silicon Valley Bank

    Thanks to a subscriber for this memo from Howard Marks which may be of interest. Here is a section: 

    Total U.S. bank assets exceed $23 trillion.  Banks collectively are the biggest real estate lenders, and while we only have rough ranges for the data, they’re estimated to hold about 40% of the $4.5 trillion of CRE mortgages outstanding, or around $1.8 trillion at face value.  Based on these estimates, CRE loans represent approximately 8-9% of the average bank’s assets, a percentage that is significant but not overwhelming.  (Total exposure to CRE may be higher, however, as any investments in commercial mortgage-backed securities have to be considered in addition to banks’ holdings of direct CRE loans.) 

    However, CRE loans aren’t spread evenly among banks: Some banks concentrate on parts of the country where real estate markets were “hotter” and thus could see bigger percentage declines; some loaned against lower-quality properties, which is where the biggest problems are likely to show up; some provided mortgages at higher loan-to-value ratios; and some have a higher percentage of their assets in CRE loans.  To this latter point, a recent report from Bank of America indicates that average CRE loan exposure is just 4.5% of total assets at banks with more than $250 billion of assets, while it’s 11.4% at banks with less than $250 billion of assets. 

    Since banks are so highly levered, with collective equity capital of just $2.2 trillion (roughly 9% of total assets), the estimated amount the average bank has in CRE loans is equal to approximately 100% of its capital.  Thus, losses on CRE mortgages in the average loan book could wipe out an equivalent percentage of the average bank’s capital, leaving the bank undercapitalized.  As the BofA report notes, the average large bank has 50% of its risk-based capital in CRE loans, while for smaller banks that figure is 167%.

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    EU Hydrogen Quotas Raise Global Demand For Green Molecules

    This article from Bloomberg may be of interest. Here is a section: 

    European Union (EU) lawmakers have agreed on the world’s first binding quotas for using renewable hydrogen (H2) and derived fuels. The March 30, 2023 rules will create significant demand for renewable H2, mandating existing industrial hydrogen users replace at least 42% of their demand with renewable H2. They also mandate at least 1% of transport energy to be H2-based.

    Member states should ensure 42% of existing industrial H2 demand is renewable by 2030, rising to 60% by 2035. The industry quota targets companies such as fertilizer and methanol producers, but excludes refineries, which are covered under the transport mandate. Member states will be legally required to adopt this agreement as national law and the European Court of Justice will determine penalties for states that fail to comply.

    In transport, fuel suppliers need to replace 5.5% of final energy demand with H2 or advanced biofuels, with a minimum target of 1% for H2-based fuels by 2030. BNEF expects the hydrogen share to be closer to the minimum goal as meeting the combined target using H2 alone would require extensive use of the molecule in road transport. Advanced biofuels had already reached a 2.1% share in transport by 2021.

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    Rains Seen Hurting Start of Coffee Harvest

    This article from Bloomberg may be of interest. Here is a section: 

    Heavy rains are expected in both arabica and robusta producing areas this week, Climatempo meteorologist Nadiara Pereira says in a Tuesday report.

    Increased rainfall and lower temperatures over robusta areas in Espirito Santo and southern Bahia may delay the final maturation phase of crops.

    Heavy rains are expected for arabica areas in Sao Paulo and Triangulo Mineiro through Wednesday

    Temperatures will fall in arabica region of southern Minas Gerais by the end of the week, though the risk of frost is low.

    Rains could knock fruits off trees and in extreme cases cause them to ferment on the ground, HedgePoint analyst Natália Gandolphi says in report.

    That would reduce uniformity of the beans and decrease quality of the crop for both varieties.

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    Eoin's personal portfolio: another commodity long initiated April 17th 2023