Energy is the key investment for 2022, and it probably doesn’t matter whether it comes from old or new sources because demand from an electrifying world is already overpowering supply with the predictable effect on price.
Lithium, leader of the “new energy” metals is showing the way with last year’s 500% rise in the Chinese price of the metal, but coal also rewarded investors prepared to look past its poor environmental record with a 115% rise for thermal grade material used in power generation.
While hard to repeat this year, the upward trend has shown no sign of easing over the past few weeks.
Smaller lithium exposed exploration companies and project developers have also started to ride the energy wave with upward share price moves such as 37% rises by both Lake Resources (ASX: LKE) and Galan Resources (ASX: GLN) over the past month.
Coal, oil and gas also on the rise
Coal, thanks to a fresh squeeze on supply courtesy of an Indonesian ban on exports, has outperformed lithium this week, rising by 14% with a corresponding increase in the share prices of coal miners such as Whitehaven (ASX: WHC) which has traded up to a three-month high of $2.76 and Stanmore, up 17% to $1.21.
What’s happening in markets for old and new energy is a perfect example of the effect of rising demand and curbed supply, which has triggered a powerful price reaction that is unlikely to fade this year, and perhaps continue for the rest of the decade.
Oil and gas are also riding the energy wave as an increasing number of countries struggle to meet surging demand and while a gas shortage in Europe is the headline maker, there are other energy-deficient countries forced to limit industrial activity such as Pakistan shutting its all-important textile mills because of limited gas supply.
For Australia’s gas export sector what’s happening is a continuation of near-boom conditions, which started to develop last year when China found that it had under-estimated energy demand forcing it to significantly increase gas imports, even from countries it regards as unfriendly, including Australia.
The global shortage of seaborne traded coal and gas is starting to produce perverse results, which were not anticipated by delegates to last month’s high-profile COP26 climate change conference in Glasgow where fossil fuels were routinely portrayed as energy sources destined to disappear.
Britain, once a major gas producer from its North Sea fields, has become a big gas importer to provide essential energy no longer available from mothballed coal mines and in insufficient supply from wind farms.
Remarkable as it might seem, but Australian gas could soon be shipped to Britain and the adjacent European market, unless Asian customers soak up all available production.
Looked at from any angle and the energy sector appears to either be a mess, or a fantastic investment opportunity created by government and activist pressure to limit the supply of fossil fuels without addressing the other side of the equation, demand.
Increased investment in energy stocks
Australia’s richest miners, people usually associated with iron ore, are moving rapidly into the energy sector.
Meanwhile, Fortescue Metals Group’s (ASX: FMG) founder and chairman Andrew Forrest is promoting hydrogen as a future energy source, and Chris Ellison, boss of Mineral Resources (ASX: MIN), is investing in gas exploration.
What the richest Australians see is an opportunity to expand their exposure to a market sector almost certain to enjoy strong trading conditions from energy in every form.
Supply and demand situation
Perhaps the most relevant question for investors to consider, apart from following the rich, is how the world will meet demand for new energy metals such as lithium, while activists oppose the development of new mines – much as they oppose the development of coal mines and oilfields?
The only answer to that critical question is with great difficulty, creating a perfect climate for higher prices of all energy material, including new metals, and old fuels (a list which incorporates uranium as well and coal and oil).
For investors there are two energy issues to consider.
Firstly, look at the prices for all forms of energy (rising rapidly) and compare that trend with supply (not rising as fast).
Secondly, consider two recent examples of supply pressure on new-energy metals even as demand has been rising.
In Serbia, the $2.4 billion Jadar lithium project of Rio Tinto (ASX: RIO) faces delays because of local activist (anti-mining) opposition, while in Chile a newly-elected President, Gabriel Boric, has promised to overhaul that country’s globally significant lithium industry to extract higher taxes as well as creating state-owned lithium company – with all the inefficiencies which always accompany a nationalised business.
Squeezing lithium supply will continue to drive the price higher, as it will for other energy metals such as nickel, copper, cobalt, graphite and even aluminium.
On the flipside of the equation where is evidence of surging new-metal demand from battery makers struggling to keep up with sales of electric vehicles as shown in:
- Record Tesla sales last year of 936,000 vehicles, up 500,000 on 2020.
- Mercedes Benz unveiling a concept of its Tesla-crushing all electric EQXX, which promises a range of 1,000 kilometres per battery charge.
- Sales of EVs in Norway, a country with abundant cheap electricity, accounted for 66% of all vehicles sold in 2021, an event which will be replicated elsewhere as petrol and diesel cars are phased out.
So much has been written about the new energy revolution that it can be hard for investors to appreciate that it is not a theory, it really is happening.
But for the revolution to succeed it will require a massive increase in newly mined supplies of battery metals with early signs indicating that it will not be easy for supply to catch up with demand and that can only mean one thing, higher prices for longer.