How energy transition is driving strong commodities prices
The executive chair of Trafigura expects the higher prices paid for minerals and metals to last amid a prolonged commodities supercycle as traders look to collect a big mix of sources to meet future needs
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And I'd like to welcome our next guest, Jeremy Weir, the executive chairman of Trafigura. Jeremy, welcome.
Thank you, Neil.
So I want to start with a question that I'm going to ask throughout the summit. I mean, it's the main theme. Do you think we are in a commodities supercycle, or do you think the rebound that we've seen in commodity prices over the past year, which has been very strong, is just a cyclical recovery?
I mean, I've obviously, seen, as you said, the elevated prices. We think, on a long term basis we are going to see sustained higher prices. In the short term it may have got a little bit ahead of ourselves. We've had issues around the supply chains, single supply routes, inefficiencies in the system. And that ultimately has resulted in people wanting to have more working inventory, and as a result of that we've seen a rapid price movement, particularly in the last six months.
But then we may see a small setback, potentially. But on a long-term basis, as we see this energy transition taking place we are going to see continued demand for commodities. It's metal intensive, particularly.
And therefore, within that environment I do expect to see sustained prices at these levels and higher.
OK. So you think the structural drivers really are there for a period of prolonged, yeah, commodity price strengthening.
I do. I do. Very much so. And why? Because as we're seeing a lot of stimulative packages associated with this energy transition, this is infrastructure intensive. And we're already starting to see that actually, the funds being released in Europe. And through that we expect to see strong demand continuing in our business for a prolonged period of time.
And as a result of that, it's highly metal intensive, if you like, what this infrastructure spend is going to be. And we need to be able to have these metals available for it. So yes, it's going to be a very interesting time over the next... it's not short term, by the way, Neil.
This is... typically the commodity cycles have been one where you have a year of great excitement, and then the whole thing collapses again. This seems very different to us, and it's prolonged, and it's going to be for a long period of time.
Yeah. I mean, you mentioned metals there, and clearly they're going to play a big part in the transition, EVs, solar, renewables, etc. But what about oil? Can oil join in this supercycle as well?
Oil's got very different dynamics. I think one thing's for certain. Everyone, if you like, wants to decarbonise. And as a result of that? Are we going to need oil in the short term?
And the fact is, from our point of view, we think oil is going to be around for quite a long time. It's going to have a long tail. But one of the issues of oil is actually not so much on the demand side.
Remember, we got down to... even during the peak of the Covid crisis, we were still consuming 80m barrels of oil a day. Now we're back up to the mid to low 90s million barrels of oil today. So it has recovered quite strongly.
But most importantly, the supply situation is getting quite concerning. We've gone from, if you like, 15 years of reserves down to 10 years of reserves. And we've seen capital expenditure on oil go from, let's say, five years ago, six years ago, from north of $400bn a year to just over $100bn a year. So therefore, there's a concern, I think, that on the supply side, which will probably drive prices higher.
So could we see $100 oil again because of this lack of investment? I mean, I think you were at the St. Petersburg summit last week, and Igor Sechin was making - of Rosneft - was making this point about the lack of investment in the industry. And we see, pretty much every day, headlines about big oil companies being told not to invest by activists, and indeed, we've seen Shell back down as well last week in terms of cutting its emissions. So I mean, do you think a last spike in the oil price is possible before demand does start to plateau and decline because of the transition?
I think it depends over what period you think the price... when the spike's going to take place. I actually think there is a chance for oil to get up to those numbers, because you need higher prices to incentivise. It also maybe depends on the cost of carbon in the future as well. You need to attract capital in the business, and the fact is that on a forward looking basis the likelihood of capital availability for the industry, and the cost of capital for the industry, will be higher. So therefore, I think there is a chance we get up to those price levels.
Do you think there's a risk that we're going to head for a disorderly energy transition? I mean, I mentioned the Shell... I mean, obviously, Dutch courts told it to cut emissions. The IEA recently came out with a report saying, no new oil and gas developments. We've seen activists put on the board at Exxon.
I mean, do you think there's a risk that things are turning anti-fossil fuel, and as a result we see a disorderly energy transition with the result that prices could spike, inflation could flare up? I mean, is that a real possibility? Is this something you're concerned about?
The rhetoric has definitely changed, too, and it is very much focused on decarbonisation. And through that, the debate's becoming quite active, shall we say. I think one of the important things is that we are in a transition mode, and I would like to see it be responsible over a period of time. We've got emerging markets which rely on hydrocarbons to create value and wealth and prosperity for people. We do need the oil, and we do need energy.
And there's a risk if we take a very severe view on life and want to wind down hydrocarbons very, very quickly, because we're not ready yet for the transition to take place for electrification across the globe. Do we turn the lights out? Now that could be absolutely catastrophic.
So we just need to have a rational debate about this topic and recognise that we just can't turn the switch and go from one sector to another sector overnight. It's going to take a serious amount of investment, a serious amount of time, and a serious amount of technology.
Mm. And, of course, the risk is, I mean, if we do see a spike in, say, oil prices to $100, I mean, it's the poorest parts of the world that will suffer in that context.
Correct. But also, remember, some of these countries require oil production for their own wealth creation as well. They are producers, so I suppose it's a mixed bag. But I think most importantly, when you go to some emerging markets they really do need the hydrocarbons to basically emerge out of some of the poverty that exists in those countries, and that's problematic. So therefore, I really just think it's just very... we need to understand that we just can't apply, if you like, a developed markets and European or US standards to the rest of the world on a unilateral basis.
Yeah. I mean, what do you make of things like the IEA report? I mean, obviously Trafigura's a huge oil trader. I mean, when they're saying no new oil and gas developments, I mean, that's not realistic, is it?
Look, I think over a long period of time... first of all, the IEA report is a long term. We're talking by 2050, OK.
So this is a marathon. It's not just a short term sprint. But we do have to transition out of hydrocarbons, and we do have to do it logically and sensibly. And therefore, I just... I think we're planning now on a long term future basis. We have to go down that trajectory, but it's not here today, and it's not here tomorrow. It's going to be a long term process that we have to amend our energy stack and energy mix.
OK. But just to go back to one of my previous points, you wouldn't rule out a spike in energy prices if that investment doesn't come through.
Correct. I think we can see... again, it's more to do with what is a sustainable price over a long period of time for the oil market? Now what is the price required to incentivise capital, which is going to be more expensive, incentivise new production? You are seeing the independent oil companies move or transition their business model to be, if you like, broad-based energy companies. So we need to ensure that we can supply oil, when it's needed, for a period of time.
And what do you think that incentive price might be?
$75 is a good price for oil now. I mean, people are doing relatively well. But on a forward looking basis, if the cost of capital increases, or if carbon prices increases and we may see inflation as well, it may need to be higher. Also, the governments might start to tax in different ways.
So it does depend on other parameters. So I'm not here to forecast where the oil price is going to be in five years' time. It's really the incentivisation of the... what price to incentivise new production.
OK. Well, let's turn to the energy transition in a bit more depth. I mean, what part does a big commodity trader have to play in the energy transition?
We're about supply chain management. So we have a very integral part to play. As a business we're generally asset-light, so we can reorientate our business. We still trade a significant volume of oil, currently in excess of 7m barrels of physical oil a day.
We're also providing the metals which are needed for the energy transition. We're a significant trader in copper, so supply chain management from sub-Saharan Africa or South America into the consuming regions of European into Asia. So therefore... and we need to do that in a very cost effective manner.
Then we move into the renewables space where we're looking at renewable energy. What are the new fuels going to be, the non-hydrocarbon fuels going to be? What role can we play in carbon trading?
We can provide.. we are investing in these areas. We are developing new divisions to provide services to our customer base. So for me, it's something which we can, if you like, tilt our business according to the demands of the industry and our customer base, and we are doing that very actively and on a proactive basis.
So you can invest in renewables and gas and power on one hand, but also, I mean, you've made an investment in Rosneft's Arctic oil project, Vostok Energy as well. So I mean, you can tilt either way, really, depending on where you see demand coming from.
Correct. I mean, basically, the Vostok investment, we're a a long term... we have a long term commercial relationship with Rosneft. This is a very large field. As I said, we need oil for the future. It's a low-sulphur fuel, so and it's got a carbon footprint of 25 per cent of normal conventional producer, and it's already producing at the moment anyway.
And this is something which... again, this oil will be needed for the energy transition. At the same time we also have a partnership with IFM, and we've established Null Renewables, which is going to be investing in or developing 2 gigawatts for solar... and battery storage. So yes, we're investing in these areas as well. And I don't think it's a conflict at all. Basically, it's we're managing our business through this transition.
Yeah, I mean, I did want to ask that question about whether it is a conflict, whether, on the one hand, you can talk about investing in renewables, cutting your emissions, and then at the same time, invest in a big Arctic project. But you don't see any contradiction.
No, I don't see a contradiction. I think, basically, we have to... we're a broad-based industry. We're involved in the oil and energy business, and we're involved in the minerals and metals business. And now we're involved in the renewables energy business. So therefore, that is our footprint.
So my view is very much... and it's well supported by the management team, which really understand the energy transition, and they're very much... it's something they're very impassioned by. But we've got to... we can't turn off the lights.
You can't just start and stop. And so therefore, I don't see any conflict or contradiction at all through the processes and the investments we're doing.
But I mean, say I mean, let's take renewables. I mean, what sort of proportion of your business do you think it could be, say, within a decade?
It's good that you mention a decade, because I think to develop a business and being, if you like, a global leader in a certain commodity or business sector takes 10 years. I very much believe it's going to be a very strong third pillar for our business, and I think it could be a significant P&L contributor to our company, definitely within five years, and definitely within 10 years. I think this, and I would also add carbon to this as well, because I think this is going to be a massive area. And I'm very looking forward to developing this expertise in this business.
I mean, just on carbon, I mean, you say it's going to be a massive area I mean, in what respect? I mean, is this the voluntary offset side of things, that you can team up a carbon credit with a barrel of oil to make it low carbon? I mean, is that where you'd see the growth coming from in this market, or is it the more standardised European trading mechanism that you see an opportunity in?
I mean, look, we're finding our path in this. It is very much a very new business. But you have your regulated business, and you have your voluntary systems. I do think you're going to have to see some changes within the voluntary systems to have proper accreditation processes and regulation for these businesses to give them... and to allow some degree of convergence to the regulated marketplace.
What do we see? I think there's going to be a lot of services that we can provide. We've already done and provided zero-carbon shipments of condensate and naphtha in this area. We get a lot of inbound from our mining customers about zero-carbon shipments of metals.
So it's... and so therefore, a combination of understanding your carbon footprint, which we are trying to do as an organisation anyway, under our, obviously, scope one and two, but also scope three emissions, and then providing these service to the customers as they, if you like, to decarbonise the supply chain. And given the sizeable footprint we have as an organisation and the breadth of commodities this can be applicable to all parts of our business.
So I mean, do you think carbon credits can help secure a future for crude oil, LNG shipments, etc?
I think actually to have a zero-carbon oil is going to be challenging.
But I think to do zero-carbon supply chains is a different matter.
I mean, we have to look at other systems for further reducing the carbon footprint of oil and other hydrocarbon businesses. But it's going to be... it will be an important part, particularly on the supply chain side. In the minerals and metals side, it's going to be equally impor... even more important, simply because, obviously, I think there's more capacity to move the needle for those particular businesses.
Yeah. And what do you see at Trafigura as the fuels of the future? I mean, is it hydrogen we should be focusing on, or is it green ammonia, sustainable aviation fuel, renewable diesel? What is the fuel of the future for you?
Firstly, I think there's going to be a big mix. I don't think you can singularly say there's going to be one particular for or the other. That being said, we are very... on non-hydrocarbon fuels, we're very much focused to the hydrogen-based fuels and ammonia for mobility.
From ammonia point of view, we have a relationship with MAN, where we're developing an ammonia-based green shipping engine, which hopefully will be actually finalised by 2024. So and we think... and we've also got a joint venture with Yara in terms of the bunkering side of the business for ammonia shipping and marine-based fuels.
And also, from a hydrogen point of view, I think for on-land mobility, we've invested here in a company in Switzerland which is vertically integrated, producing green hydrogen and all the way through managing hydrogen fuel cell trucks, which is providing logistical service for supermarket chains. And we want to replicate that across Europe and other locations.
So quite frankly, I think... and there's a lot to do in this area. All the technology isn't quite there. A lot of investments to make. But it's a very exciting area, and one which we're very committed to.
Yeah, I mean, the technology's not there, but it's certainly coming along quite quickly in areas, like ammonia and hydrogen. But the infrastructure also needs to come as well, doesn't it? I mean, how is that going to emerge? I mean, we need government backing, don't we, and incentives? Regulation in order...
Yeah, look, that's a huge... I mean, look, technologically-wise, it could be done. But the fact is there's a huge amount of capital expenditure in terms of piping hydrogen, if the pipelines are there, the electrolyzers required to convert renewable energy into hydrogen, and then the conversion to ammonia. So there really is a lot of technology and huge amounts of capital expenditure.
But then again, I think Europe is starting to push very hard. There's a lot of exciting projects under consideration at the moment. And I think, as I said, it's a very exciting area to be involved with.
So we could expect more ventures, more investments in those sort of areas from you going forward?
Yes, correct. And working with partners, finding people which we can work with in these particular areas with certain competencies or complementary competencies, the partnership model works very well for these type of investments.
OK. Now one of the things that sets Trafigura apart from some of its peers is your metals and minerals business, which is obviously quite big. And the shift, as we said, to clean energy is going to require a lot of metal, copper, nickel, cobalt, etc. I mean, the World Bank is saying that we might need over 3bn b tonnes of new metal to achieve the 2-degree C future. But where's all this copper, cobalt going to come from? I mean, is the world going to be able to produce enough of it to hit these targets, do you think?
Right, in terms of renewable, if you like, energy transition, you're using five times as much copper in an electrical vehicle as you do with a typical internal combustion engine-run vehicle. All the grid work, there's a huge amount of copper required, but also, just metal intensity is going to be enormous as we construct the infrastructure for this transition. We forecast demand to increase effectively, I think it's by 10m tonnes by the end of the decade, which is - and it's currently - it's a 30m million tonne - will be a 30m tonne market.
So it's quite a significant increase. Yet we've only got supply in our forecast by about 5m tonnes. So we've got significant deficits on a forward looking basis. So therefore, what do we need to address this problem? And we have been, if you like, discussing this with various bodies and administrations around the world.
Price can be one incentive to increase the supply, but the issue is it takes a minimum of five and normally 10, even 10 to 15 years, to develop a new mine operation. So what we need to try and do is, if you like, speed up the process without reducing our environmental impact, studies and all the proper things that you need to do to develop something responsibly. But we need to actually be far more efficient in developing new resources.
Yeah, but the problem is, I mean, it seems that every big new mine that is proposed comes up against some sort of opposition from local communities or campaigners that slows the process down more and more and more.
That is the issue. And unless we address that, we're going to have a serious problem, because copper prices can go significantly higher. You will see some sort of replacement or maybe on other materials and scrap metal, etc. But at the end of the day, if we want to electrify, we need copper. So therefore, we're going to have to find a solution to the problem.
But do you think...
And price isn't the solution... isn't the only solution.
Yeah, but do you think policymakers are aware of this, they actually realise?
I think they're increasingly aware. The sort of dialogue we've been having, people are starting to understand the complexity of the problem and the issues around the supply chain for these metals which are needed for the transition. And so therefore, they are becoming aware. They just don't necessarily have the solution yet. But they're becoming increasingly aware of the situation.
Yeah. But I mean, obviously, you're making some moves in the battery supply chain. I mean, you helped with the buyout of Vale's New Caledonia nickel mine. Goro was one example, what you're doing in the DRC with artisanal supply.
I mean, from the customers you're talking to, are they concerned that China Inc, as it were, has cornered the market for battery materials? And they are starting to worry about their supply chains, where western carmakers going to get its material from. Are those fears coming through for you?
Not really. I mean, OK, China has a significant portion of the manufacturing of batteries at that moment. Yet they've also got the largest number of electrical vehicles on the road, so therefore, that's understandable. In their own, in-country I think they have something like 5 per cent of the raw materials that they need, and they've obviously, through their offshore acquisitions, maybe have something in the region of 30 per cent.
So therefore, there's still a lot of debate. They might have the manufacturing capacity, but not necessarily the supply chain and the raw materials for that. We are seeing significant changes within Europe and the US with people looking to develop battery manufacturing centres within trading regions. So therefore, I think you'll see the dynamics changing, particularly as we... more and more electrical vehicles are being registered on the roads and being manufactured in these areas. So I don't see that being a particular problem.
In relation to some of the metals you mentioned, nickel, yes, we've invest... we saw the need for these type of materials. Nickel is a very important ingredient in the battery... in manufacturing of batteries for EVs and industrial purposes. And so therefore, we will be a significant supplier of those to the international marketplace.
And in cobalt, we have a joint venture with the government of the Democratic Republic of Congo. This is where we're providing sustainable jobs for artisanal miners which are extracting cobalt. It's regulated. They're getting proper market prices.
It's been... they've got supervisory processes by NGOs to make sure it's all done properly and correctly, and this is providing livelihood to hundreds of thousands of people. It's also a significant supplier of cobalt to the world. So this responsible resourcing initiative is something which the world needs, and it creates, if you like, employment for the local people, either... as I said, in a responsible manner. So it's critical that these processes take place and these supply chains are in existence.
OK, we're running short on time, unfortunately, but just a few more questions I'd like to get through. Thermal coal. I mean, it is probably the most hated commodity out there. Yet I mean, and we've seen reports that you're potentially interested in creating a vehicle, almost a bad bank for coal assets that are unwanted by the majors. Can you tell us a bit more about that? I mean, is that a venture you are interested in getting involved in?
Well, I think, I can't tell too many details, because it's still under concept, but coal is still.. we're in this transition. Coal is still... produces the energy required in some of the emerging markets in India and other locations. We recognise that coal long term is not a commodity of the future, but again, to transition, we have to do this in a way.
And we're looking, quite frankly, at a private/public partnership where we can wind down our coal industry by 2040, leaving 70 per cent of the reserves in the ground and ensuring... getting investors into a vehicle and ensuring we have a fund overseeing this as well to provide sustainability and jobs for the people which are left behind as you close that industry, ensure the mines can be closed down properly.
So this is something... it's a concept we're working on at the moment. But again, it's trying to manage the transition. It's not trying to be opportunistic around something, because I think you've seen some people getting out of an industry, trying to extricate them from a sector, and yet their business is still there. And I think we've got to try to have a long term sustainable solution to this industry.
OK. Now last, but not least, you released half-year figures last week, and they were a record, really. I just... $2bn of net income in the half year, never mind the full year. I was just wondering if you could tell us how you did it.
Look, bit it's been a very pleasing set of results for the company following on from a strong year of last year. What we're seeing this year it's really a very strong performance across our entire commercial trading division. Each block, each set has really performed very well.
We've increased volumes. We've got a very, I'd say, highly skilled, dedicated teams running the business, and I'm very happy with what they've been able to achieve. And our industrial asset base is turning around, so it's, as you say, a very strong set of results, very pleasing set of results, and it's reflective of, I think, the position we have in the marketplace.
So you think you've taken market share?
I think we have taken market share, but again, as I mentioned beforehand, a lot of that's to do with managing market volatility, servicing customers, being able to have the working capital and the higher price regime to ensure that you can provide the services which your business is designed to do. So yes, we've taken a bit of market share.
Yeah, I mean, it's interesting. I mean, personally, I thought that last year might be the high watermark for the industry in terms of profitability, yet these conditions, decent trading conditions have continued.
I think it's... we'll have to see how others perform. I can't comment on other businesses. But from our perspective, I see a great opportunity set on a forward looking basis. The existing businesses have all performed really well.
We've talked about the renewable space. We've talked about carbon trading. These are very exciting new businesses, which fit very well into our existing platform. And then I think over a period of time I'd like to think we'll excel in those areas.
Yeah, and overlaying it all we've got the long term prospect of a supercycle, which, I mean, you can see, as we said at the start of this conversation.
Yes, I think sustained higher price regime for a period of time as part of the move through this energy transition. And again, this is not just a one or two-year phenomenon. To me, this is over the next decade or so, so therefore, very important. And I think we're pretty well positioned for it.
Well, sadly, we're going to have to bring this conversation to an end. I think we could have continued much longer. But thank you very much, Jeremy, for talking to us today and giving us a great overview of how you see the energy transition and a commodity trader fitting into it. So thank you very much.
Pleasure, Neil. Thanks very much.