Frozen power lines
As many of you know, I grew up in Toronto, where winters can be brutally cold. Like most people who live in northern U.S. states, I’m accustomed to driving on snowy, icy roads.
But then, roads in the north are plowed, sanded and salted when there’s snowfall. With rare exception, the roads here in sunny San Antonio, Texas, do not see that kind of maintenance. There are no snow plows or salt trucks. Driving, then, can be several times more precarious when we get the kind of extreme weather that hit us last week.
Similarly, our electrical power infrastructure was designed to withstand heatwaves, not blizzards. I think a lot of Texans last week learned for the first time that a large share of the Lone Star State’s power grid operates separately from the rest of the U.S. Because of this, much of the infrastructure, including plants and pipelines, has not been winterized, which contributed to the widespread outages that left millions without power and water for days.
Texas Interconnect Power Grid Separate From Others
That fact alone, I believe, presents a good investment case for commodities and natural resources.
A joint state and federal investigation into the outages has already been announced, and improvements to (and winterization of) aging infrastructure will likely be recommended, if not required, to prevent this from happening again. Such a massive overhaul would require an incredible amount of metals and other basic materials, which would be positive for miners and producers.
We’re particularly bullish on copper, used extensively in electrical wiring and circuitry. Our favorite explorer-producer is Ivanhoe Mines, which recently announced positive mining results at its Kamoa-Kakula project in the Democratic Republic of Congo (DRC). Ivanhoe is up about 116% over the past 12 months. Our favorite speculation play is CopperBank Resources, which offers investors optionality to higher copper prices. Shares of the company are up more than 200% for the 12-month period, and today they hit a new all-time high of C$0.61.
Texas is the ninth largest economy in the world, ahead of Canada, South Korea and now Brazil. It consumes more energy than any other U.S. state. Its residents and businesses deserve a world-class power grid that operates reliably in all weather conditions, even those that strike only once every 100 years.
No Energy Source Alone Is to Blame for the Outages
I want to briefly address something that I’ve been hearing and reading this past week. Some have used the outages as an opportunity to point fingers and criticize the reliability of different forms of energy, from fossil fuels to renewables.
Not only is this kind of talk counterproductive, but it’s also simply not rooted in fact. No single energy source was responsible for bringing the whole system down. Texas is well diversified when it comes to electricity generation, as you can see below.
Texas Energy Capacity Breakdown
A little over half of Texas’s power comes from natural gas, which largely went down due to frozen wells and pipelines.
The state’s next biggest source, wind, also had issues, but these issues represented only around 13% of the blackouts. That’s according to Dan Woodfin, senior director for the Electric Reliability Council of Texas (ERCOT), which manages the Texas grid.
As I’ve pointed out before, Texas is the U.S. leader in wind energy, with close to 31,000 megawatts (MW) of installed capacity and 7,620 MW currently under construction.
However, another state’s wind capacity ranks higher in terms of percentage of its total energy. In 2019, wind accounted for 42% of Iowa’s net generation, the largest share of any other state.
We invest heavily in renewable energy, and we will continue to do so because that’s where the trend is headed. Among our largest holdings are Vestas Wind Systems, Canadian Solar and Plug Power. These positions have helped us crush the S&P Global Natural Resources Index over a number of time periods.
JPMorgan: A New Commodities Supercycle Has Begun
It’s not just renewables, though. We believe commodities as a whole look very attractive right now due to a number of factors.
I believe we’ll see demand from China surge in the coming months and years as the country comes out of the pandemic as the only major economy to expand in 2020. Last Thursday, February 18, Chinese stocks, as measured by the CSI 300 Index, hit a new all-time high, exceeding the previous record set in October 2007.
That was near the end of the last commodities supercycle. One highly regarded quant analyst believes we may be on the verge of the next one.
In a note to clients this week, JPMorgan’s Marko Kolanovic wrote that he thinks commodities have finally turned after a 12-year down cycle. The potential drivers of a secular bull market, says Kolanovic, include the end of the pandemic and reopening of economies, fiscal stimulus, end of the U.S.-China trade war, ultraloose monetary policies and increased and “tolerated” inflation.
He also notes ESG investors, or those who put special emphasis on environmental, social and corporate governance concerns. President Joe Biden seeks to go big on an infrastructure package that’s expected to favor renewables, which is supportive of metals, electric vehicles (EVs) and batteries.
New Commodities Supercycle?
Kolanovic’s outlook is shared by many other analysts and investors, including Goldman Sach’s Jeff Currie, head of commodity research. In a recent interview with S&P Global Platts, Currie (who called the previous supercycle) said he’s bullish on oil and believes copper is likely already in a secular up cycle. “I want to be long oil and hang on for the ride,” he said in the February 5 interview.
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