Dryblower on '22, energy year

THERE are few certainties in life but when Dryblower peered into his crystal ball for guidance to 2022 he saw a decades-long energy-driven event to rival death and taxes.
Dryblower on '22, energy year Dryblower on '22, energy year Dryblower on '22, energy year Dryblower on '22, energy year Dryblower on '22, energy year

Battery metals are an obvious player in the energy game but they're only at the end of the process fulfilling the role of storing what's been produced by burning fossil fuels or capturing what's been produced, in a variety of ways, by that giant nuclear reactor in the sky called the sun.

Direct exposure to energy, along with storage and distribution, is where the big money will be made over the next few years as the world struggles with a fundamental disconnection between energy supply, and demand for baseload power to keep industry functioning and the lights on at home.

Right now, energy is in a sweet spot caused by the compounding effects of strong demand as supplies of old energy (coal, oil, and gas) are squeezed out by government regulation and activist pressure before viable alternatives such as nuclear and renewables can be expanded to plug the gap.

Wind and solar might eventually be a mainstay of the global energy system but not yet, and that's why China and Europe have turned back to the most reliable form of base-load power, coal.

Change is on the way, such as the European Union's belated recognition of natural gas as a halfway house on the road to a renewables future, and the inconvenient reality of nuclear being redefined as "green" energy - once you disregarded the waste disposal problem.

But as Blower was looking at the next 12 months he was reminded of two investment maximums which rarely disappoint. Firstly, follow the money. Secondly, invest like the rich, a combo which leads to the actions of three mega-rich miners, Gina Rinehart, Andrew Forrest, and Chris Ellison.

Rinehart, who has a long history of seeking exposure to energy but mainly through coal in Queensland, has placed a small bet on lithium in Germany for battery metals exposure, followed by a takeover of the oil and gas producer Senex Energy in joint venture with Korea's steel giant, Posco.

Forrest has been busy rebranding himself as the king of hydrogen with multiple investments that might (or might not) become viable businesses, though his salesmanship has ensured that there will be no shortage of capital as investors rush to back his vision which is to replicate his iron ore success.

Ellison's energy interests are similar to Rinehart. Lithium, with a modest interest in gas to power his mining and mineral processing operations.

Barclays Bank set the tone for resource sector investing in '22 with its pre-Christmas note about the importance of CLANC minerals - copper, lithium, aluminium, nickel and cobalt - in meeting the needs of energy transition away from fossil fuels to a time of renewable energy.

As investment advice, the CLANC theme is a winner, though it only addresses the second half of the energy equation; storage.

It would also be wise for an investor to watch out for prices getting too far ahead of underlying demand and the potential for new supply to eventually plug any demand shortfalls.

If energy in its many forms (ancient and modern) is the key theme for '22 what's outlook for the rest of the resources sector?

Good, in parts, is the wary forecast, a bit like the Curate's Egg in the famous Punch cartoon about a cleric commenting on his rotten boiled egg by trying to not offend his host even though there can't be any good parts in a rotten egg.

The issue, as Blower sees it, is that last two years have been too good to be true as the stars aligned with a recovery from the COVID-crash of 2020, powered by oodles of government stimulus cash and a rush by investors to dodge the value destruction of negative interest rates.

Times change, and that's why the resources sector will not see a re-run of the 70% increase in the ASX metals and mining index between March '20 and today, or the 60% increase in the All Ordinaries index.

Gold, the canary in the financial cage, has been signaling for the past 12 months that a sea-change is overdue, which is why the gold price is down 12% from its peak in August 2020 and the ASX gold index is down 33% over the same time.

What worries investors is the cocktail of potential negative events this year which are unlikely to be offset by the fading of the COVID pandemic or the supply shocks caused by mine outages and transport bottlenecks.

The three potential shocks which have kept Blower awake over the New Year holidays are:

  • A slowdown in China as its government enforces strict COVID lockdown rules which could put a brake on the world's second biggest economy, drying up demand for minerals and metals.
  • The certainty that an interest rate rising cycle will start in a matter of week following Friday's news that unemployment in the US dropped to a pre-pandemic 3.9%, a critically low reading which will unleash central bankers, and
  • Cost increase which are a leftover from the era of government stimulus bumping headfirst into higher interest rates.

It's stretching the point, but an overdue re-set of investment fundamentals is underway which will test gold bugs and apply pressure to base and ferrous metals used in the construction sector development, especially in China where a wholesale rout of property developers is underway, and the country is primed for another 12 months of hard lockdown as an impossible goal of zero-COVID is pursued by the central government.

In that picture, energy (including battery metals) will to be the only winner thanks to a squeeze on supply which will drive prices up even if demand is flat.