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CERAWeek: Investor appetite for energy transition unparalleled: HSBC

05 March 2021 Keiron Greenhalgh

The rapid change underway in economies as a result of the energy transition is more than matched by investors' willingness to bankroll it, perhaps more so, a senior banker said 4 March, but whether they realize what the sector's supply chain involves, and are comfortable with it, is another matter.

Speaking on a CERAWeek by IHS Markit conference panel, Jan Laubjerg, HSBC global head of natural resources, said there was more capital available than was needed for all the energy transition investment opportunities - innumerable though they may have seemed in the past 12 months.

It was, he said, "a fire hose of capital chasing a very small set of opportunities globally."

The energy transition economy was one of the few sectors that saw a net inflow of capital after the COVID-19 pandemic imposed a chokehold on finance and companies around the globe, Laubjerg said, adding that he had not seen anything like this in the three decades he had been working in the finance sector, even during the dot-com boom. What was taking place was happening on a systemic rather than on a cyclical basis, he said.

That said, according to the banker, some misunderstandings still exist about what is involved at the very beginning of the supply chain that powers the transition.

"Capital provisions from the traditional capital markets [have] still to get comfortable with the economic realities that copper mining is required, that cobalt mining is required" for the energy transition, Laubjerg said.

That's a bit of a problem, according to Jeremy Weir, CEO at global trader and miner Trafigura. Demand for copper from the energy transition arena is set to quintuple, he said.

And prices are set to jump too. Given the timeline for mining projects of around five to 10 years, the supply response will lag, said Weir, which meant there would be a "significant [supply] deficit on a forward-looking basis" in various commodities.

It won't just be copper where there is a deficit, he said, with the likelihood of a supply surplus in the steel, zinc, nickel, cobalt, and aluminum markets in the coming transition minimal. But copper, he said, was the prime metal in this regard.

Commodity markets are already very robust at the moment, said Weir, noting that demand began to bounce back following the pandemic's initial phase first in China, then in the US and western nations, and then in emerging markets. That bounce was due both the industrial recovery and the energy transition, he said.

Return, risk, reward

The picture painted during the panel, hosted by IHS Markit Vice Chairman and Pulitzer Prize-winning author Daniel Yergin, was bullish for both the energy transition and the mining and minerals industry that will power its growth.

However, the returns on capital will be below the risk that the sector provides, and could fall for the next three to seven years, Laubjerg said. But he predicted it won't halt the flows of capital.

Observers and investors must, he said, bear in mind that these forms of technology are going to have a higher debt ratio than their predecessors in any form of technological disruption, so the likelihood is that interest rates could dictate the viability of particular technologies and projects. Current rates are a boon for the industry, but the societal momentum is such that any rise in interest rates from such relatively low levels won't be able to disrupt the disruptors.

The risk won't even deter investors in the hydrogen arena. Looking back as little as two or three years, but certainly five or 10 years, and the banking community was very hesitant to take technology risk, especially for hydrogen, Laubjerg said. While the technology being used by the hydrogen sector for chemical operations was, he said, something many had learned at school, the reality was that on a scale basis, it had a new technology feel to the banking sector.

No one expects …

That being said, a change has arrived, with banks now willing to embrace a degree of technology risk if it sits within the energy transition world, Laubjerg said, even though no one knows exactly how the technology will evolve.

There are many unknowns, the panelists said, pondering who could have expected the energy transition to facilitate a change in the supply chain for the energy sector from liquids, to gas, to solids.

A similarly unexpected shift came in the location of the starting point of supply chains, said panelist Mark Mills, strategic partner, Cottonwood Venture Partners. The location is changing, from the Middle East and the US, to Russia, China, and Africa, he said, with Africa a "pseudonym" for China when it comes to mining energy minerals.

Another surprise, according to Mills, is the absolute quantity of materials required per energy unit delivered to society in the transition era, which he said has risen about 1,000%. The quantity of materials being moved out of the earth will be unprecedented in human history, he added.

Posted 05 March 2021 by Keiron Greenhalgh, Editor, Energy and Natural Resources Group, IHS Markit

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