Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn'tal And I'm Tracy Halloway. So, Tracy, you see,
Speaker 1: we just got the latest CPI report I did. Indeed,
Speaker 1: looks like cp I came in slightly hotter than expected,
Speaker 1: like not a huge deviation from the forecast. But of
Speaker 1: course everyone's talking about the idea that, well, all of
Speaker 1: this was supposed to be transitory, and yet you know,
Speaker 1: here we are almost two years into the global pandemic
Speaker 1: and it doesn't seem like any of this is going away, right,
Speaker 1: And so of course there's this debate about what transitory means,
Speaker 1: doesn't mean pandemic related or does it mean brief. So
Speaker 1: we're sorry to split hairs on that. And then there's
Speaker 1: also you know, of course, the deviation between headline CPI,
Speaker 1: which includes energy prices core which doesn't. But the degree
Speaker 1: to which you could really ever like separate out commodities
Speaker 1: from the fact that commodity to go into everything is
Speaker 1: kind of impossible. And with the exception of a few things,
Speaker 1: I mean, we are on a massive commodity slash energy
Speaker 1: bull run. Yeah. So the crazy thing here is that
Speaker 1: people were worried about higher inflation, even before the commodities
Speaker 1: market really started going nuts, like just in the past
Speaker 1: month or so. I mean, I'm looking at some of
Speaker 1: the energy headlines that have just come over the Bloomberg today,
Speaker 1: and it's stuff like, you know, European zinc smelters cutting
Speaker 1: production by as much as fifty because of higher energy costs,
Speaker 1: and you know, a flood in a major Chinese mine
Speaker 1: and the Chinese government ending its intervention in the coal market,
Speaker 1: so basically liberalizing that entire market, which isn't something that
Speaker 1: you tend to see that much in China, but is
Speaker 1: something that is sort of needed given the energy pressures
Speaker 1: right now. So things have just gotten like to a
Speaker 1: whole new level when it comes to commodities. Yeah, and
Speaker 1: it's interesting you framed that really well, because you know,
Speaker 1: sometimes we do our logistics episodes and one of the
Speaker 1: themes is the way these sort of pressures compound. Right,
Speaker 1: So something that happens at the Port of Los Angeles
Speaker 1: ends up affecting warehouses, which ends up affecting truckers, which
Speaker 1: ends up affecting rail and Chicago. And it feels like
Speaker 1: on the raw commodities front, you see the same thing
Speaker 1: where it's like, oh, some energy price spikes, and then
Speaker 1: the zinc smelters and the fertilizer companies have to pairback
Speaker 1: production because their production is no longer is profitable, and
Speaker 1: then that feeds into you know, some other, some other
Speaker 1: commodity or something like that. And so it feels like
Speaker 1: there is a similar compounding effect, and it's probably you know,
Speaker 1: it seems like a combination of demand supply obviously, and
Speaker 1: then there's sort of like all kinds of idiosyncratic factors,
Speaker 1: like whether it's droughts or whatever. Yeah. Well, the other
Speaker 1: big thing that people are talking about now is how
Speaker 1: much of this is caused by the transition to clean energy.
Speaker 1: So this idea that we've had years of structural under
Speaker 1: investment in traditional fossil fuels and now we're sort of
Speaker 1: reaping the consequences of all of that. You know, we
Speaker 1: don't have enough renewable energy to satisfy demand just now,
Speaker 1: but we also don't have enough traditional fuel. So there's
Speaker 1: just so much going on in the space. Yeah, and
Speaker 1: that that seems particularly salient in Europe, where they sort
Speaker 1: of pretty aggressively phased down nuclear and now the natural
Speaker 1: gas bills are storing anyway. Wait, wait, I just gotta
Speaker 1: say now, some people are talking about reclassifying nuclear as
Speaker 1: e s G, so something that would fit under the
Speaker 1: Environmental and Social and Governance friendly mantle, which is something
Speaker 1: that you know, if you suggested that a few years ago,
Speaker 1: people would have gone absolutely nuts. Anyway, go ahead, anything
Speaker 1: to fit anything within e s G is probably like
Speaker 1: its own it's own storry. Anyway, we have the perfect
Speaker 1: guest on because not only is he probably the best
Speaker 1: person to um talk about commodities with period, but we've
Speaker 1: had him on before. We had him on earlier this year,
Speaker 1: actually in January, and he was very bullish on commodities then,
Speaker 1: so being very knowledgeable, yes exactly. In addition to be
Speaker 1: extremely knowledgeable, he also has the benefit of having been correct,
Speaker 1: which a lot of people weren't. And so now we
Speaker 1: are we'll see what's next. Excited to bring our guests.
Speaker 1: We're gonna be speaking again with Jeff Curry, here's the
Speaker 1: global head of Commodities research at Goldman Sachs. A real
Speaker 1: treat to have him on. Jeff, thank you so much
Speaker 1: for coming back on odd lots. Great pleasure to be
Speaker 1: here again. So it's been I guess like nine months
Speaker 1: since we had you on in January and you were
Speaker 1: sort of called, you called you were bullish, and you said,
Speaker 1: this is like a big one that used a big
Speaker 1: cycle coming. And obviously if you just look at the Beacon,
Speaker 1: the Bloomberg Commodities Index or numerous you know, other headline measures,
Speaker 1: that was right. And so what what's your take on
Speaker 1: what what happened? What how did How does what happen
Speaker 1: to compare to what you foresaw? It's far more bullersh
Speaker 1: than you know, we could have ever envisioned. Let's take oil.
Speaker 1: The deficit that we can measure at the end of
Speaker 1: last month was running somewhere around four point five million
Speaker 1: barrels per day. That's nearly five percent of the market.
Speaker 1: Isn't a deficit that is such a large hole that OPEQ,
Speaker 1: the US administration, nobody's going to fix this. This is
Speaker 1: like you know, the train is off the track and
Speaker 1: you're watching it in slow motion. But it's not just oil. Uh,
Speaker 1: you see it in copper. Copper inventories dropping eight percent,
Speaker 1: ten percent week after week. These are numbers I have
Speaker 1: never envisioned or never seen before. You know, and you
Speaker 1: can think about what is going on here, and I think,
Speaker 1: you know, it goes back to Tracy's point about that
Speaker 1: zinc smelter shutting down in Europe, that problems in one
Speaker 1: market create problems in the other. So we think about
Speaker 1: you know, you know, first it was coal in China,
Speaker 1: then it became gas in Europe. Um, then it became
Speaker 1: aluminum in China, which then impacts copper elsewhere in the world.
Speaker 1: And it keeps this chain reaction going, and each one
Speaker 1: of these markets get tighter and tighter. So what is
Speaker 1: it about oil that makes this deficit so much larger
Speaker 1: than we could have ever envisioned. It's because you now
Speaker 1: have oil being used in lieu of both coal and
Speaker 1: gas because of the shortages in those markets. So bottom
Speaker 1: line is, you know, we see a lot of upside
Speaker 1: risk from these price levels which are far greater than
Speaker 1: the price levels we were forecasting when we spoke not
Speaker 1: you know, nine months ago. So bottom line, the underlying
Speaker 1: picture is far more bullish than what we had expected
Speaker 1: nine months ago. But the drivers of it are pretty
Speaker 1: much in line exactly what we thought, just in a
Speaker 1: much larger degree than what we thought. Yeah, if I
Speaker 1: could just press on that on this point, So I
Speaker 1: remember when when you unveiled your bullish commodities pieces, UM,
Speaker 1: you know, around the start of the new year or
Speaker 1: at the end of you sort of had like a
Speaker 1: trifecta of reasons UM that you thought were going to
Speaker 1: drive the market. And one was the idea of this
Speaker 1: redistributional demand, so basically, you know, people getting stimulus checks
Speaker 1: and going out and buying new things and buying steak
Speaker 1: dinners and things like that. And the second one was
Speaker 1: I think structural under investment in traditional energy like oil.
Speaker 1: And then the third was this idea of supply chains
Speaker 1: and stockpiling, so people just sort of trying to build
Speaker 1: up their own energy independence or resiliency. And I'm curious,
Speaker 1: just looking back at that framework, is there a particular
Speaker 1: thing that that has surprised you or stood out, Like,
Speaker 1: is there one leg of that sort of tripod analysis
Speaker 1: that has UM really like caused the big spike that
Speaker 1: we're seeing. Actually, all three are far more important than
Speaker 1: what we ever envision, and I actually want to go
Speaker 1: with the one that predates COVID, and the one that
Speaker 1: predates COVID is the under investment thesis. You know, the
Speaker 1: theme that we termed it is the revenge of the
Speaker 1: old economy put bluntly poor returns in the old economy,
Speaker 1: saw a capital redirected away from the old economy and
Speaker 1: towards the new economy, basically taking from the exxons of
Speaker 1: the world and given to the netflix of the world.
Speaker 1: And as a result, you starve the old economy of
Speaker 1: the capital base it needed to grow production and hence
Speaker 1: the problems with today. So if it's trucking in the US,
Speaker 1: which is old economy, chip manufacturers for autos which is
Speaker 1: old economy, energy and gas in Europe, or coal in China,
Speaker 1: they're all the same story. Now you can argue with
Speaker 1: the hydrocarbons, as you pointed out that you know the
Speaker 1: E S G factor turbo charges this story, and it
Speaker 1: clearly has in places like Europe. But I want to
Speaker 1: emphasize at its core is that these companies have failed
Speaker 1: to delt over good returns over the last five to
Speaker 1: ten years and investors have had enough. And I like
Speaker 1: to point out, you know, we got a lot of
Speaker 1: investors back into the commodity and old economy space, you know,
Speaker 1: and when we were talking last January, but prices went
Speaker 1: up to eighty this summer on on oil. I remember
Speaker 1: it was late August, round August there was a Friday
Speaker 1: Oil collapsed back down to six five, and these investors going,
Speaker 1: you lured us back in there, You said the coast
Speaker 1: was clear, We got in here and we just got
Speaker 1: completely hammered in terms of the volatility. They left. Then
Speaker 1: oil prices, where are they getting their back up to
Speaker 1: eighty three? And that there's something inherent about the investments
Speaker 1: in here that make it difficult to attract capital. It's
Speaker 1: not gonna be a smooth ride, you know, like it
Speaker 1: is in tech stocks where you just trended up. Instead,
Speaker 1: it's going to be very volatile. So the bottom line,
Speaker 1: we're sitting there eight four dollar barrel oil um today
Speaker 1: and there's no evidence of big increases in capex drilling,
Speaker 1: greenfield capex in in in metals or you know, new
Speaker 1: eight re gen agriculture. I can keep going down the list.
Speaker 1: So not only are the C suites of the corporates
Speaker 1: not spending on capex, but the investment dollars in this
Speaker 1: space is quite low um. And as a result, if
Speaker 1: you get the investors to come back into space, which
Speaker 1: we think could happen if we go into year end,
Speaker 1: it could catapult the situation on relatively tight fundamentals that
Speaker 1: I started this discussion with. So I would say that's
Speaker 1: the one I want to point out the startk But
Speaker 1: just quickly on the redistribution story that that you bring up.
Speaker 1: The redistribution story is much broad based around the world.
Speaker 1: Then then what we initially thought and if we think
Speaker 1: about you know, in the US when we were talking
Speaker 1: to January, we have ever envisioned the three point five
Speaker 1: trillion dollar US Human Infrastructure Fund. Absolutely it was. I mean,
Speaker 1: it shows you how much larger these redistribution policies have become. Also,
Speaker 1: you know the one point nine trillion dollar Recovery Act
Speaker 1: back in you know, March then we thought it's going
Speaker 1: to be one point one trillion. It shows you just
Speaker 1: how much bigger these redistribution policies. China has its common
Speaker 1: prosperity green leveling. Here in the UK, um, so it's
Speaker 1: very you look at Germany's government um going moving left,
Speaker 1: you know, Latin America's move left since we last talk.
Speaker 1: So the bottom line is, you know, the redistribution policies
Speaker 1: are also bigger than what we thought. And then finally
Speaker 1: just point on you know about the call it deglobalization.
Speaker 1: I'd like to argue the trucking problem in the US
Speaker 1: exemplifies the problems around d globalization. Is because you have
Speaker 1: too much stuff being produced locally at home in the US,
Speaker 1: which overwhelms the transportation, warehousing, trucking, rail system, which has
Speaker 1: helped create some of the problems there. So when we
Speaker 1: can think about United States exemplifies the problems with de globalization.
Speaker 1: Europe exemplifies the problems with de carbonization with what's going
Speaker 1: on in its gas crisis. Anyway, that's a long answer
Speaker 1: to your question about all th surprise to the up side.
Speaker 1: I mean, we want to hit all these topics more,
Speaker 1: but let's go little bit more into this sort of
Speaker 1: like decarbonization E. S G stuff, because I think there
Speaker 1: are a lot of people who are like, ah, we
Speaker 1: told you so. You had your like you politicians had
Speaker 1: your visions of like a green economy where at all
Speaker 1: like how everything with windmills and solar panels and now
Speaker 1: look and now look at the price we're paying and
Speaker 1: maybe we won't even be able to heed our homes.
Speaker 1: But the way you described it as a little bit
Speaker 1: as like maybe some of that, but also like politics society.
Speaker 1: A lot of these traditional fossil fuel investments were not
Speaker 1: great period. So how much is it sort of as
Speaker 1: you say, decarbonization policy, they've contributed to the that's contributing
Speaker 1: to this revenge of the old economy versus decarbonization economics
Speaker 1: where people just weren't making the investments because the numbers
Speaker 1: weren't good. Yeah. That the bottom line is the returns
Speaker 1: in this sector were abysmal. And I don't care if
Speaker 1: it is oil again. When you say this sector, you mean,
Speaker 1: we're just to be clear about oil prices were negative
Speaker 1: last year. You couldn't create a more hostile environment, you know.
Speaker 1: So when you look at the investors that I try
Speaker 1: to get to come back in this space, they're going, no,
Speaker 1: I've been there, I've done that. I know how painful
Speaker 1: this sector is. Um And so the way you could
Speaker 1: argue is E s G. The binding constraint. Show me
Speaker 1: a great company with fantastic returns. It's not getting capital
Speaker 1: due to E s G. Right now, they don't get
Speaker 1: returns because they've demonstrated a very difficult environment to generate
Speaker 1: returns on average. In fact, you know, you look at it,
Speaker 1: they've shrank down to two and a half percent of
Speaker 1: the SMP five, which show to give you an idea,
Speaker 1: in the late seventies they're running around. So it's a
Speaker 1: big shift here. And I think you know so you know,
Speaker 1: I spend time talking to many um, you know, energy specialists,
Speaker 1: and you get C I. O. S of these big
Speaker 1: asset managers on going, hey, I'll listen to him once,
Speaker 1: but I've been there and done that before, and I'm
Speaker 1: just not that interesting. And here's a point when you
Speaker 1: look at the two thousand's um that bull market prices
Speaker 1: spiked in oh three, but it wasn't an until oh
Speaker 1: six that the capex began to flow. Why because they
Speaker 1: had a couple of years of really good returns and
Speaker 1: the and the investors felt really good about it. But
Speaker 1: I think you know the key point here is first
Speaker 1: and foremost it is the revenge of the old economy
Speaker 1: and poor returns why the sector doesn't get money more recently.
Speaker 1: You can say that you know it's likely to be
Speaker 1: E S G. But I'm gonna give you an example
Speaker 1: in Europe where it clearly is E s G. You know,
Speaker 1: the courts in Europe the head ruled against Shell, made
Speaker 1: Shell liable for scope three emissions. That's what the users
Speaker 1: of oil created. You know, that's massive liability. UM. Yes,
Speaker 1: they all appeal. It is going to be you know,
Speaker 1: five ten years from now. I think the key point
Speaker 1: here is that UM with that kind of liability risk,
Speaker 1: nobody in the right mind is gonna make large scale
Speaker 1: investments in places like the North Sea again because they
Speaker 1: don't want to be associated with that kind of live
Speaker 1: So it is beginning to bite. But is that you
Speaker 1: know your standard E s G um investors And I
Speaker 1: do want to say, they've raised the cost of capital
Speaker 1: and we're going to find out. And this is where
Speaker 1: the E s G really comes into play, because we're
Speaker 1: going to find out what price of oil do you
Speaker 1: need to get capital to flow? I like Scott Sheffield
Speaker 1: of Pioneer, he said a few weeks ago. He goes,
Speaker 1: he I don't care if the oil price goes to
Speaker 1: a hundred dollars of barrel. I'm not going to drill.
Speaker 1: What's gonna make me drill? I need my stock price
Speaker 1: to double. And we're going to find out at what
Speaker 1: price of oil these investors will start to buy these
Speaker 1: stocks again. You may be maybe right, Joe, and maybe
Speaker 1: you know that they're just not going to buy it
Speaker 1: because of E s G concerns. I tend to think
Speaker 1: that's not the case. There is a cost of capital
Speaker 1: associated with de carbonization, and we're going to find out
Speaker 1: what that cost is. Just on the topic of oil,
Speaker 1: I mean, how much blame can you lay at OPEC
Speaker 1: for investor unwillingness to put money into stuff like US
Speaker 1: shill So you know, there was always the sense that
Speaker 1: if shale flooded the market, then OPEC would react in
Speaker 1: some way and boost their own production and drive a
Speaker 1: bunch of the shale producers out of business. And then now,
Speaker 1: even as we see oil prices pressured higher, I mean,
Speaker 1: OPEC is still being pretty disciplined in terms of production.
Speaker 1: They haven't said they're going to ramp up output by
Speaker 1: that much. So I guess the question is, like, what
Speaker 1: role does OPEQ play in investors calculations? The current OPEC
Speaker 1: they got religion, they understand it, They've been through a
Speaker 1: lot of pain. They couldn't have a better business model
Speaker 1: than what they have today. They're focused on balance in
Speaker 1: the market on a near term basis, keeping inventory low,
Speaker 1: keeping the forward curve and what we call a backwardations
Speaker 1: are focused on what they can control, which is the
Speaker 1: very near term balance, and then they create a credible
Speaker 1: threat that will bring on in capacity, bring investment on,
Speaker 1: which keeps the back into the curve it depressed, so
Speaker 1: they got what we call a back redated curve. Spot
Speaker 1: prices are high, back end prices are low. But to
Speaker 1: get to that level, well, to get to this great
Speaker 1: discipline and that I would argue, you know, a great
Speaker 1: um policy structure which makes sense of given how much
Speaker 1: share they control in the market. It was a big
Speaker 1: policy mistake, and that policy from November sixteen till March
Speaker 1: of two thousand and twenty was utterly disastrous and created
Speaker 1: a lot of problems we have today. They didn't. They
Speaker 1: not a monopolist. They're not like the Federal Reserve, where
Speaker 1: they have a percent market share over the dollar. They
Speaker 1: don't have. They have, maybe you put them all together,
Speaker 1: a thirty three to market share over the barrels. And
Speaker 1: so for their ability to cut back production and maintain
Speaker 1: prices at six sixty five was always invariably unstable, and
Speaker 1: the investors that got lured into investing in the sector
Speaker 1: based upon that sixty dollar price had a high probability
Speaker 1: of having the problems that they ran into in late
Speaker 1: nineteen in um so, but I do want to say
Speaker 1: I think they've learned from those mistakes. You know that
Speaker 1: the new group of of energy ministers in particular, I
Speaker 1: think they understand all these issues, and so I'd argue
Speaker 1: that they're doing a fantastic job. But they're they're really
Speaker 1: sticking to what they're supposed to do, and what they're
Speaker 1: really good at is managing a near term imbalances in
Speaker 1: the market and focusing on providing capacity on a longer
Speaker 1: term basis, which has left the curve and the forward
Speaker 1: curve and a backgradation which makes it really difficult for
Speaker 1: you know, the e MP producers to hedge. Why because
Speaker 1: prices are a huge discount on the back end relative
Speaker 1: to where they are on the spot. So before we
Speaker 1: move off of oil, I want to talk about US
Speaker 1: oil a little bit more. And you know, I'm thinking
Speaker 1: back to like the good old years, and there was
Speaker 1: this perception, or there was this characterization of US shale
Speaker 1: as the swing producer that sort of kept a lid
Speaker 1: on prices because as soon as prices would rise a
Speaker 1: little bit, they could quickly ramp up production and that
Speaker 1: would bring prices down, and part of it was a
Speaker 1: rate story, maybe part of it was a technology story.
Speaker 1: What is the status of US production now and why
Speaker 1: is it not having that effect of being able to
Speaker 1: ramp up aggressively and sort of smoothly. I mean, I
Speaker 1: think there is some increase in the ring counts, but
Speaker 1: as you as you said, not that much. So why
Speaker 1: are we not seeing something greater out of the U
Speaker 1: s as a stabilizing for US? For one, back then,
Speaker 1: you know the companies were rewarded on volumetric growth, not
Speaker 1: on return on equity. The investors paid a terrible price
Speaker 1: for that period. You look at the industry and you
Speaker 1: know it destroyed a lot of wealth, like ten to
Speaker 1: twenty cents on every single dollar. I think the number
Speaker 1: is actually closer to thirty cents on every day super
Speaker 1: basically like every so basically that aggressive supply response it
Speaker 1: was just a mistake, Like it was just a bad
Speaker 1: it was it was in retrospect, it turned out to
Speaker 1: be a bad approach to business because they were they
Speaker 1: were operating at like a hundred and five hundred and
Speaker 1: fifteen percent of cash flow, So you know what they
Speaker 1: were doing is they're basically growing volumes on the expectation
Speaker 1: of future returns. But obviously when you grew all those volumes,
Speaker 1: you get crushed on the back end in terms of
Speaker 1: what was being delivered, and so the focus left being
Speaker 1: a focus on r o E and instead being a
Speaker 1: focus on growth. Today the focus is on r o E.
Speaker 1: They want to get those return on equity up. And
Speaker 1: by the way, the investors who owned this company, they
Speaker 1: want their money back, you know, the the the OPEC
Speaker 1: ministers want their money back. Everybody wants their money back
Speaker 1: from the disastrous experience over the course of the last
Speaker 1: call it, you know, five to seven years. So at
Speaker 1: this point you look at why aren't they drilling because
Speaker 1: for the first time in nearly a decade, in fact,
Speaker 1: you probably have to go back to oh yeah, you
Speaker 1: got to go back to oh seven oh eight, that
Speaker 1: these companies are finally getting free cash flow going up,
Speaker 1: they're not overspending um, they have returns moving higher, and
Speaker 1: so now they're getting rewarded on return on equity as
Speaker 1: opposed to growth. And it's gonna be a while. They're
Speaker 1: gonna get they want everybody wants to be made whole,
Speaker 1: and then they're going to get the green light to
Speaker 1: go out and invest. It goes kind of the point.
Speaker 1: I think Scott Sheffield got it right. The focus here
Speaker 1: is not on the dollar price of oil, but where
Speaker 1: is their stock price and their access to capital. Now
Speaker 1: here comes the whole E s G issue, which means
Speaker 1: that that hurdle rate is going to be higher and
Speaker 1: higher before that capital is going to come in and
Speaker 1: make that stock price go higher. I tend to think
Speaker 1: there's always somebody in the world out there who's going
Speaker 1: to buy this, which is why when you look at
Speaker 1: the you know, the investors that do pursue, you know,
Speaker 1: these E S G strategies, it's going to be difficult
Speaker 1: because there's gonna be somebody out there in the world
Speaker 1: that's not restricted around these is gonna go out and
Speaker 1: make these investments, which I think, you know makes it.
Speaker 1: You know, it's not a level of playing field right now.
Speaker 1: Since you brought up E S G, I mean, I
Speaker 1: guess the obvious question here, the big question is what
Speaker 1: does all this mean for E S G or green investment.
Speaker 1: Do we start to see a backlash to green investing
Speaker 1: and do investors, you know, maybe start pulling out capital
Speaker 1: or put less capital in or divert some capital to
Speaker 1: you know, older fossil fuel energies things like that. Well, I,
Speaker 1: you know, I have a couple of points on that. One.
Speaker 1: Divestors never solved any problem. And when we think about
Speaker 1: you know, with with you know, e s g in particular,
Speaker 1: it came about originally because the Europeans were getting frustrated
Speaker 1: that the Americans and Chinese were not doing anything on
Speaker 1: the policy side. But why the problem? Why the investors
Speaker 1: drifted into the policymaker lane as the policymakers weren't doing
Speaker 1: their job. And when we think about what job they
Speaker 1: need to do, they need to create you know, rules
Speaker 1: around decarbonization that allowed operators to operate around and gives
Speaker 1: investors the rules of the road in which to invest around.
Speaker 1: And that's kind of the problem, is that there's this
Speaker 1: nether world as occurring. They got these investors just trying
Speaker 1: to invest in our policymakers trying to make these investments
Speaker 1: in things that they don't really understand. And I think
Speaker 1: it's a really risky environment that we're in. And I
Speaker 1: think what's going on in Europe is a testament to
Speaker 1: what the misallocation of capital that it can occur in
Speaker 1: this environment and where you're not let markets dictate and
Speaker 1: policymakers dictate what the rules of the road are and
Speaker 1: what you know, you know investing around those rules of
Speaker 1: those roads. M hmm. Just just on one of those
Speaker 1: points there. I mean, the point about the role of
Speaker 1: the government there is well taken, and that's been one
Speaker 1: of the major criticisms of E s G, that they're
Speaker 1: trying to fulfill something that should actually be done by
Speaker 1: governments and through new laws and things like that. But
Speaker 1: there's also this sort of foundational debate in e s
Speaker 1: G about whether or not it should be investors engageing
Speaker 1: with companies to make them change their behavior. So you
Speaker 1: care about the environment, you're invested in x In or
Speaker 1: Shell or whoever, and you try to encourage them to
Speaker 1: change their behavior by actually being invested in having a
Speaker 1: relationship with the company, or do you ignore them all
Speaker 1: together and invest only in companies that are doing renewable
Speaker 1: energy that have divested all the old traditional dirty stuff
Speaker 1: and you try to increase the cost of capital for
Speaker 1: anyone who is basically in that old energy space. UM,
Speaker 1: I don't know what my question is here, but like
Speaker 1: I guess it's how do you think like E s
Speaker 1: G should function, Like what is E SG trying to do?
Speaker 1: I I think you know your your X on example
Speaker 1: is is spot on. You know, it's it's going there
Speaker 1: and you know, going in there and helping the situation
Speaker 1: and trying to find the solution is the right answer.
Speaker 1: It's the divest your knee jerk reaction that's the dangerous one.
Speaker 1: And I want to really distinguish between that. So when
Speaker 1: we think about you know E s G, that that
Speaker 1: that you know preserves the you know, the market signaling,
Speaker 1: then it's it's working great, it's just there where you go. Okay,
Speaker 1: anything that's hyder carbon is bad. Let's shut down the
Speaker 1: investment because bottom line, India should not have three days
Speaker 1: of coal stocks left right now. Just think about that,
Speaker 1: three days of coal stocks. If all of a sudden
Speaker 1: you had a major disruption, India would be out of
Speaker 1: power in three days. That's a dangerous place to be
Speaker 1: for one of the largest, most populous countries in the world.
Speaker 1: Let's talk about some of this sort of like ongoing
Speaker 1: sort of mechanical disruption issues that we're seeing. And I
Speaker 1: want to actually focus in on what we're seeing in
Speaker 1: China because it seems to be there's a number of
Speaker 1: moving parts. Tracy and you both talked about that earlier. Overall,
Speaker 1: what is your take Let's start a big picture and
Speaker 1: then maybe zoom in on specific commodities, but overall, what's
Speaker 1: your take on sort of like the Chinese energy picture
Speaker 1: because it seems like very extraordinary and unusual. Well, I
Speaker 1: you know, it boils down to um shuttering of you know,
Speaker 1: very toxic cold mines. I like to point out what
Speaker 1: what China is going through today is very similar to
Speaker 1: what the US did in the seventies when you know,
Speaker 1: creation of superfund sites. So it shut these down reasonably.
Speaker 1: These things are very toxic. Then you don't have the
Speaker 1: investment in coal globally, and then you have a foreign
Speaker 1: policy spat between Australia in in China. So you put
Speaker 1: it all together. The access to coal drop tremendously post
Speaker 1: COVID son And by the way, this is all stems
Speaker 1: to the fact that these supply constraints were there. It
Speaker 1: took that post COVID surge in demand that exposed it
Speaker 1: all across you know, metals, oil, gas, coal, trucking, you know,
Speaker 1: whatever picked your industry, it exposed them all in the
Speaker 1: old economy UM, and it had probably have happened to
Speaker 1: be particularly acute in coal in China. So then what
Speaker 1: happened is then they had to replace the lost coal
Speaker 1: with gas, so they started to hoover up the world's
Speaker 1: l n G supplies. Then they replaced the hard to
Speaker 1: replace in it more recently with with oil UM and
Speaker 1: that's what's helped create the big deficit in oil in
Speaker 1: the BID and oil UM. So the bottom line is,
Speaker 1: you know, you put it together, the situation is dire
Speaker 1: enough that are even our economists have trimmed fourth quarter
Speaker 1: GDP to being flat with three quarter and taken down
Speaker 1: first quarter of twenty two. Now there's investments in coal
Speaker 1: and mongolia, and then you know potential increase in exports
Speaker 1: of three hundred thousand tons that many people point to
Speaker 1: that means this problem goes away next year. UM, it
Speaker 1: eases the problem. What about further growth rates in GDP
Speaker 1: and more activity. It just puts more stress on the system.
Speaker 1: That's why we like to argue this thing is a supercycle,
Speaker 1: meaning that and then think about how much stress you
Speaker 1: put into um, aluminium, zinc and all these other industries
Speaker 1: where you've had to shut shut down smelters. So if
Speaker 1: you want to really think about the chain reaction here, Um,
Speaker 1: some people kind of simplify the world, it starts in China,
Speaker 1: coal and China, and then that creates tightness and gas
Speaker 1: that created the problems in Europe. Europe subsidized substitutes into oil,
Speaker 1: creating a problem in oil. You've shut down the alley smelters,
Speaker 1: zinc smelters, and that, you know, so a lot of
Speaker 1: people say, you know that that the ground zero of
Speaker 1: this problem really was coal in China. So I do
Speaker 1: want to say the situation in China is very dire,
Speaker 1: but it's just one power of the world that can
Speaker 1: create a solution to it rather quickly than they're trying
Speaker 1: to with investments in Mongolif I want to be careful
Speaker 1: about restarting a lot of that shuttered coal, for those
Speaker 1: of us that are Americans and know what a super
Speaker 1: fund side is in the US, restarting these facilities is
Speaker 1: going to be a lot more difficult, a lot more
Speaker 1: expensive than I think what people think it will be.
Speaker 1: So you really got to focus on the new, more cleaner,
Speaker 1: sophisticated coal and some of these mines in places like Mongolia.
Speaker 1: So bottom line, it's going to be tight over the
Speaker 1: next three to six months. But once you get that
Speaker 1: Mongolian coal up and running, um the situation at ease.
Speaker 1: But no way doesn't solve it. You mentioned it briefly,
Speaker 1: but you know, when we when we talk about important
Speaker 1: global commodities, obviously the first one that comes to mind
Speaker 1: is probably oiled and I don't know, maybe natural gas.
Speaker 1: Aluminum prices thirteen year high in China, and of course
Speaker 1: aluminium is used in all kinds of just everyday item.
Speaker 1: So for thinking about how commodities bleed into sort of
Speaker 1: normal inflation, that seems like an important one to focus on.
Speaker 1: Can you walk through a little bit more about the
Speaker 1: economics of aluminium in China right now and what you
Speaker 1: see going on sort of like putting this inexorable upward
Speaker 1: pressure upward price pressure there. Aluminium is a unique commodity.
Speaker 1: You know, it's the climate change paradox you needed to
Speaker 1: solve climate change. But it creates a lot of emissions
Speaker 1: in the production of it, so you know it does
Speaker 1: to the same And so when we think about the
Speaker 1: situation in China right now, if you're operating on a
Speaker 1: call it a carbon budget. You know, you're allotted this
Speaker 1: amount of carbon production for your economy. One of the
Speaker 1: most polluting verb you know, commodities, In fact, it is
Speaker 1: the most polluting commodity to produce is aluminum. You're not
Speaker 1: gonna want to produce. It's gonna be the first thing
Speaker 1: you shut down and you think about what really is aluminum?
Speaker 1: It is solid energy. You just take aluminum electricity, you
Speaker 1: put the two together, and now you've got, you know,
Speaker 1: a solid piece of metal there. So if you're trying
Speaker 1: to conserve energy, conserve you know how much carbon you're emitting,
Speaker 1: the first thing you're going to pull the lever on
Speaker 1: is going to be aluminum. Which is why, um, you
Speaker 1: look at you know, just you know, you know it's
Speaker 1: China's get cut two million metric tons of capacity. Now
Speaker 1: that in about a fifty million metric ton market, so
Speaker 1: it's sizeable in terms of what they've what they've taken
Speaker 1: out on top of you know that stuff that's already
Speaker 1: been taken out elsewhere in the world. So that's really
Speaker 1: at the core of what's driving this. By do to
Speaker 1: go back to the point about cost push inflation, the
Speaker 1: commodities being drinken by cost push inflation, there is zero
Speaker 1: evidence of it. It's always demand pull in the sense
Speaker 1: that you know, demand is strong across every single one
Speaker 1: of these commodities, services, and everything else, and it's demand
Speaker 1: pulling everything along against the supply constraints that creates the
Speaker 1: upward pressure around prices. It's not the input costs accelerating
Speaker 1: UM that's driving up the costs in other parts of
Speaker 1: the industry. But if you think about how did it,
Speaker 1: you know, aluminum, how does it create tightness in other markets?
Speaker 1: Because once you lose a supply, let's think about starts
Speaker 1: with coal tightness in coal. It's not that the coal
Speaker 1: price led to higher aluminium prices. What it was was
Speaker 1: a lack of coal led to a shutdown of aluminum
Speaker 1: smelting against strong demand. That drove up the price of aluminum,
Speaker 1: which then feeds into more demand for copper as a
Speaker 1: substitute against aluminum. So you get you know, you can
Speaker 1: think about it as being you know, the supply chain,
Speaker 1: you know working along that way, or you know. So
Speaker 1: it's not that that the cost of um, you know,
Speaker 1: energy is being you know, driving the cost of everything.
Speaker 1: It's demand and pulling everything along. And when you think
Speaker 1: about it that way. Um, you know, that's how you
Speaker 1: get broad based inflation, because it's not just because think
Speaker 1: about if it's isolated in one market, let's say oil prices,
Speaker 1: that's a relative price move. And if you think about
Speaker 1: if money supply stays the same, the price of oil
Speaker 1: goes up, then the price of everything else has to
Speaker 1: go down because there's an adding up constraint with money supply.
Speaker 1: But if you think about a demand is pulling everything along,
Speaker 1: money supply is growing along with it, then the price
Speaker 1: of everything starts to grow as opposed to being a
Speaker 1: supply shock, being you know, derelative price movement. Away. You
Speaker 1: touched on this earlier, but what's the difference between a
Speaker 1: bowl market in commodities versus a supercycle? And like, I
Speaker 1: sometimes get the sense that, like commodities experts are very
Speaker 1: sensitive on this particular topic, mostly because I had an
Speaker 1: argument earlier in the year about whether or not what
Speaker 1: we were seeing was a commodities boom or the start
Speaker 1: of a supercycle, and people got very very pedentic. But like,
Speaker 1: what is the difference and which one are we looking
Speaker 1: at at the moment um? We're looking at a commodity
Speaker 1: supercycle and It goes back to this demand demand story.
Speaker 1: It needs a structural rise in demand. I can get
Speaker 1: a bowl market and oil driven by a supply stock
Speaker 1: in Saudi Arabia, but that's not a supercycle. A supercycle
Speaker 1: is driven by a structural rise in demand. And why
Speaker 1: do we have a structural rise in demand? And give
Speaker 1: me a minute here is I really want to explain
Speaker 1: this point because I think it's critical to understanding the
Speaker 1: difference between physical markets and financial markets. And we think
Speaker 1: of physical markets like oiler our medium there what we
Speaker 1: call volume metric markets. How do you determine if you're
Speaker 1: bullish oil the volume of demand versus the volume of supply?
Speaker 1: If demand is about supply, your bullish. No dollars enter
Speaker 1: into the equation, No growth rates, nothing like that interest.
Speaker 1: So physical markets driven by volume? Now what our finding?
Speaker 1: Financial markets and GDP they're all driven by dollars. How
Speaker 1: many dollars do you pump into those markets? Um that
Speaker 1: determines whether or not they're bullish or not. You know,
Speaker 1: so no volume enters into a financial market. Think about
Speaker 1: equity you quote it in billions of dollars or g
Speaker 1: d P you quote it in trillions of dollars. Volume
Speaker 1: doesn't injure. So let me summarize physical markets driven by volume,
Speaker 1: financial markets, and GDP driven by dollars. Now, let me
Speaker 1: ask you the following. What do the world's rich control dollars?
Speaker 1: They control wealth and income. Can rich create financial inflation?
Speaker 1: Absolutely yes? Can they create GDP? Absolutely yes? And they
Speaker 1: cre eight physical good inflation numerically impossible. There's not enough
Speaker 1: of them. It's a volumetric game. And so only the
Speaker 1: world's low income group can create inflation and um commodity
Speaker 1: bowl markets. And there is no exception that you cannot
Speaker 1: find me an exception. Every commodity supercycle is driven by
Speaker 1: low income groups as well as every bout of inflation.
Speaker 1: In fact, you know, let's start with the seventies. It
Speaker 1: was lb j's um war on poverty. The two thousand's
Speaker 1: when China was admitted to the w t O. It
Speaker 1: was a gigantic wealth transfer rich Americans and rich Europeans
Speaker 1: to low income, rural Chinese, four hundred million of them.
Speaker 1: There was your volume created inflation in China in a
Speaker 1: commodity bowl market. You know, the inflationary episodes in Latin
Speaker 1: America tied to populist policy and the list goes down
Speaker 1: and on. So you come to the conclusion that inflation
Speaker 1: and commodity bowl markets are directly tied to popular policies.
Speaker 1: And I can't find an exception to that. So if
Speaker 1: we argue that we're in an environment in which there's
Speaker 1: a you know, a great focus on low income groups,
Speaker 1: and even think about green capex, as Joe Biden says,
Speaker 1: green capex creates jobs, as Boris Johnson here the UK
Speaker 1: says it calls it green leveling, spending on green capex
Speaker 1: to create jobs. Um So everywhere we look, even the
Speaker 1: green capex is focused on lower income groups. And as
Speaker 1: a result that we look across the demand levels. You know,
Speaker 1: gasoline barrels were at all time high this summer, and
Speaker 1: I can go across the board the volumes, just look
Speaker 1: at the level of demand endurable goods and everything like that,
Speaker 1: it's off the charge. So that's the reason why I
Speaker 1: think we're in a commodity supercycles, not because of anything
Speaker 1: else other than that simple observation that the volumetric demand
Speaker 1: growth we see right now and going forward is not
Speaker 1: just a you know, but you know, it's something that's
Speaker 1: hitting all the markets simultaneously. UM and that's really what
Speaker 1: is at the core of a supercycle. So stody losing
Speaker 1: production create a bowl market in oil, but that's not
Speaker 1: a supercycle. Is that clear? Yeah? That was fantastic. So
Speaker 1: I guess, like you know, I know, we just have
Speaker 1: a couple of minutes left here. But you know, like
Speaker 1: I said, we talked to you in January, I felt
Speaker 1: like you nailed the call, and then some we're in
Speaker 1: the supercycle as you characterize it. I don't know, commodities,
Speaker 1: it's always a cliche innings, so to speak. But what
Speaker 1: are we going to be talking about with you in
Speaker 1: nine months when we rebook you? And how much longer
Speaker 1: is this going to be going on? Like, give us
Speaker 1: your what's it? What's gonna happen in the future, what's
Speaker 1: your crystal balls? Then we're going to be pricing scarcity
Speaker 1: at that point in time across oil, metals and everything
Speaker 1: at that point in time. And when we think about,
Speaker 1: you know, the transitory nature of these events is that
Speaker 1: when the system is so strained like it is right now,
Speaker 1: it just takes a small little problem to create a
Speaker 1: big upward movement in price. Do you think about what
Speaker 1: Europe was created by? It was created by the wind
Speaker 1: quit blowing, the market had to replace that wind power
Speaker 1: generation with natural gas, and there was no gas there
Speaker 1: in a small event like the wind quip point created
Speaker 1: a massive price bike. Um. And these are what it's
Speaker 1: stated before you have to have to draw something out
Speaker 1: of the tails to get a problem. Today you just
Speaker 1: draw something in the middle of the distribution, and you
Speaker 1: get a problem, which means that these transient events are
Speaker 1: going to be their higher probability and more frequent in nature.
Speaker 1: So there becomes a persistency to the transitory events. That's
Speaker 1: what scarcity pricing is all about. It's not like they're
Speaker 1: going to get a big upward training prices, but you're
Speaker 1: gonna continue to get, you know, price spikes. So you know,
Speaker 1: I think that most that you know, if you brought
Speaker 1: me back in six months, I think that's going to
Speaker 1: be the highest pain point. By the time we look
Speaker 1: at nine months, Um, you know, do you have a
Speaker 1: much higher probability of the system trying to find solutions
Speaker 1: to it. So three to six months, I think you're
Speaker 1: gonna that's gonna be your max pain point. On oil,
Speaker 1: we have a ninety dollar target. I want to emphasize
Speaker 1: lots of upside risk to that UM. You know, we
Speaker 1: look out into next year, we're eleven to twelve tho
Speaker 1: dollars a ton on copper, but you know, out of
Speaker 1: upside risk to that UM. So you know, but the
Speaker 1: real upside risk, I would argue, probably happens in that
Speaker 1: UM first quarter of next year. Hopefully when we meet
Speaker 1: nine months from now, we can say, hey, you know
Speaker 1: we see drilling in the US, we see um Iran
Speaker 1: deal has come. You know, there's a higher probability in
Speaker 1: an Iran deal where there's the system begins to ease,
Speaker 1: which is why we see prices moving back into them
Speaker 1: at the nine months Rizon. So if we meet six
Speaker 1: from months from now, I think you're going to be
Speaker 1: peak scarcity pricing, you know, nine months from down on
Speaker 1: to a year, much higher probability that we found some
Speaker 1: type of at least solution. Max Paine is still coming.
Speaker 1: Max Paine is probably coming in the next next three months.
Speaker 1: If not soer, Max Paine is still coming. Jeff Curry,
Speaker 1: thank you so much. Always great to chat with you.
Speaker 1: A real treat And like I said, well, have you
Speaker 1: a six or nine months back and we'll see if
Speaker 1: we're at a if we're truly x pain right. Well,
Speaker 1: thanks for having me. Thanks Jeff, I appreciate it. Take
Speaker 1: care of Jeff. It's always a treat talking to Jeff.
Speaker 1: I just feel like I get like such a big
Speaker 1: such a useful, big picture perspective talking to him totally,
Speaker 1: And I mean I feel like I'm a little bit
Speaker 1: biased because, um, you know, I was a capital markets
Speaker 1: reporter for a long time. I like writing about things
Speaker 1: like corporate bonds. But I you know, I remember writing
Speaker 1: a lot about the show Boom in the US as
Speaker 1: a capital market story, and I think I did a
Speaker 1: fantastic job of like drawing that connection. Once again, You're
Speaker 1: not going to get higher oil production unless investors feel
Speaker 1: comfortable putting money into the company and the company feels
Speaker 1: comfortable actually putting that money to work in terms of
Speaker 1: investment and expanding production. And we're not quite at that point,
Speaker 1: you know what. I love that point because there is
Speaker 1: this sort of very cliche which I've always hated. The
Speaker 1: stock market isn't the economy. Actually, the stock market is
Speaker 1: a very important part of the economy, and sometimes maybe
Speaker 1: it reflects the economy, but sometimes it very much Sometimes
Speaker 1: it doesn't reflect the economy. But sometimes it drives the economy.
Speaker 1: And so when you have a CEO, as he was
Speaker 1: pointing out, and I want to go find that transcript
Speaker 1: where he's like, you know, the determinant now of how
Speaker 1: much US oil will ramp, it's actually the stock market
Speaker 1: itself and the the sort of return expectations of investors.
Speaker 1: And having learned the lesson of these sort of like
Speaker 1: two thousand tends that pure volume is not a great
Speaker 1: long term return on investment is super fascinating to me.
Speaker 1: It's like, will will drill more when the stock price
Speaker 1: goes up? Is sort of like the opposite of how
Speaker 1: people think, like, oh, the stock market is just it's
Speaker 1: just you're to what's happening in the real economy. In
Speaker 1: that case, it is clearly a driver. Oh totally. I mean,
Speaker 1: capital markets matter, and this is a really good example
Speaker 1: of that. The other thing I would say that I
Speaker 1: really appreciated hearing was his differentiation of you know, a
Speaker 1: commodities bowl market. The idea of commodity is just going
Speaker 1: up versus a commodity supercycle, and this idea that ultimately
Speaker 1: a supercycle is something that's going to come down to
Speaker 1: physical volume and scale, and so that scale has to
Speaker 1: come from you know, somewhere, and he sort of pinpointed
Speaker 1: the idea of scale coming from surging demand from this
Speaker 1: sort of what did he say, lower income class, the
Speaker 1: redistributionary impulse. Yeah, for sure, which makes a lot of like,
Speaker 1: you know, it's about scale, and so it kind of
Speaker 1: has to be about consumption from like the biggest proportion
Speaker 1: of the population as possible. So many interesting points. Uh,
Speaker 1: you know, his point about how normally, like you know,
Speaker 1: a few days without wind in the UK wouldn't be
Speaker 1: a big deal, but this time because of the tightness
Speaker 1: of the market, so many comparisons between what's going on
Speaker 1: in logistics. Really great. Getting his perspective on aluminum just
Speaker 1: is a real treat to Chalco Jeff, And again we
Speaker 1: got to get him back on in like six or
Speaker 1: nine months. Yeah, we'll make this like every nine months
Speaker 1: type event. I think that would be good. Sounds good. Okay,
Speaker 1: shall we leave it there, Let's leave it there. Okay.
Speaker 1: This has been another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All. You can
Speaker 1: follow me on Twitter at the Stalwart. Follow our producer
Speaker 1: on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow
Speaker 1: the Bloomberg head of podcast, Francesco Levie at Francesco Today,
Speaker 1: and check out all of our podcast at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening year to