One of the Best Plays into the Energy Transition
The Reserve Bank of Australia (RBA) shocked markets yesterday after raising the cash rate 0.5%, double what was expected.
The rate increase hit investors like a bucket of cold water, with the ASX dropping as the news hit.
And there’s more to come.
The RBA is tipping another 0.5% increase next month, saying they’ll do ‘what is necessary’ to get inflation under control.
The RBA may be looking to curb inflation, but the new 0.85% cash rate is running way behind the 5.1% inflation rate.
With costs rising fast, there’s a lot of concern out there. As my butcher replied after I asked how business was, ‘people are really tightening their belts’.
One of the big culprits of inflation is high energy prices.
Natural gas futures hit a 13-year high on Monday.
Oil prices are up almost 60% just this year, with the price of a barrel at US$120.
With oil prices at highs, in their latest meeting, OPEC+ agreed to increase their output from 432,000 barrels per day to 650,000 bpd for the next two months.
But that still won’t do much to replace the missing supply from Russia and curb prices. Especially as China is starting to move out of COVID lockdowns.
The world is still very reliant on oil, but high oil and gas prices are making the need for the energy transition even more apparent.
Nothing like an economic incentive to accelerate things.
The transition is about more than just going green
It’s about cheap, abundant energy and energy independence.
Europe is already accelerating its transition into renewables as it looks for independence from Russian energy.
The top producer of oil, the US, is also looking at increasing renewable energy production after high prices are hitting consumers’ pockets.
On Monday, US President Joe Biden once again invoked the Defense Production Act. As you may remember, it’s been invoked a few times before to boost the production of things like COVID vaccines, battery metals, and more recently, to increase the country’s supply of baby formula.
This time the recipient was clean energy.
The US wants to ramp up their domestic production of things like solar panels, electric transformers, heat pumps, hydrogen, and insulation.
As Biden put it:
‘Ensuring a robust, resilient, and sustainable domestic industrial base to meet the requirements of the clean energy economy is essential to our national security, a resilient energy sector, and the preservation of domestic critical infrastructure.’
It’s really starting to dawn that renewable energy is the answer to energy security and the energy crisis.
This was echoed this week by the Australian Energy Market Operator (AEMO). During a conference, the head of AEMO, Daniel Westerman, highlighted that one of the top priorities to decrease energy costs should be to continue to build large-scale renewable generation capacity.
As he said:
‘I’ve said this before, that this energy transition is not just about environmental benefits, it is a kaleidoscope of economic, technical, political, and environmental factors.
‘And these recent weeks have really reminded us about the economic benefit of the transition to low-cost, firmed renewables.
‘And the sooner we can move the nation to higher levels of firmed renewables, the sooner we can electrify more of the economy, the sooner we can decouple energy costs from international factors and the sooner we can reduce stress on Australian households and businesses.’
High energy prices act as a catalyst for the energy transition, and a lot of money will pour into it in the next decades.
Miners are crucial for the energy transition
With inflation rising and fear seeping into the system, markets have been pivoting from speculative assets into more tangible assets.
And beneficiaries of this trend could be miners, particularly miners of commodities needed for the energy transition.
At the moment, some of these stocks, in particular lithium stocks, have dropped after a note from Goldman last week.
The note basically said that investors have piled on too quickly and called the battery metals bull market ‘over for now’.
They see a correction in lithium, nickel, and cobalt prices over the next two years, only to go up again in 2024.
In my view, the sell-off has been a bit exaggerated.
Especially since there’s every indication that securing lithium supply is still a priority for players in the industry.
But it’s also good that it’s cooled off the market.
While lithium has been getting all the press lately, remember we will still need plenty of other materials for the transition, such as nickel, graphite, and cobalt — to name a few.
In particular, one of the most interesting ones for me is copper. The energy transition will involve electrifying more in our economy, and for that, we will need plenty of copper.
Until next week,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.