In our ESG and Climate report tomorrow, we are focusing on renewable materials and fuels, emphasizing counting carbon and the importance of verification and auditing. However, one of the side issues concerning renewables is their impact on food prices if they bid crops away from the food chain. The chart of the day from our daily chemical reactions report shows that corn prices are above their historical correlation with crude oil, but it also indicates a correlation and fuel markets can pay more for corn and other crop-based fuels when oil prices are high. The issue with exhibit below is that we already have inflated crop prices with minimal incremental demand for the fuel markets today. Prices are rising on strong global demand growth for food – supply chain issues that existed before the Ukraine crisis and – the supply challenges that are a direct consequence of the Ukraine crisis. This is before any significant investment in renewable fuels or materials. As governments implement policies to encourage renewable fuels – especially SAF – they need to consider what policies and incentives might be required in addition to price, encourage meaningful changes to the acres planted around the world, and help productivity where it is low.
We have talked at length in today's daily and recent Sunday recaps about our expectation for a mega-cycle in chemicals because of an unwillingness to deploy capital as uncertainty rises. The exception is likely to be large oil producers looking at long-term downstream integration plans, with the primary objective of consuming captive crude oil. The Aramco ambitions in China bear some similarities to the ExxonMobil investment announced for China last year. While the crude oil market may be tight and prices may be high today, few oil producers believe that demand will not ultimately be hurt by renewable penetration and EV and hydrogen growth as transport fuels. Looking for captive crude oil demand is a logical step for the major and it is likely that the Aramco ambitions include refining as well as chemicals in China.
Could what we are seeing in metals happen in chemicals and polymers? Over the last few weeks, we have seen already high metals pricing spike even further, both because of production shortfalls and because of expectation of higher demand, especially in the renewables space, as conventional energy prices have spiked. We show a lithium example below, but note that after chaotic nickel trading last week and a halt to trading, the market has made some attempts to reopen this morning with renewed problems.
It is a gas, gas, gas! Every other story this week is about natural gas shortages and pricing – whether it is natural gas in the US or LNG everywhere else. The scatter diagram below from the EIA below is very interesting as it speaks of anticipation more than anything else. Gas prices are high given the level of US inventory relative to “normal”. There is speculation that demand is going to outstrip supply over the next few months. Whether much of this will be LNG-related remains to be seen as we may not be able to run the current capacity any faster – that said, through the end of July it looked like there was spare capacity at several of the US LNG facilities and maybe the constraint is shipping. Regardless, the current US price implies shortage, whether because domestic demand overwhelms supply this winter or because LNG steps up. The original timeline of the Venture Global facility at Calcasieu Pass in Louisiana has slipped and this facility will not impact demand for the next 12 months at least, with ExxonMobil’s Golden Pass project a year later and targeting a 2024 start.
We have discussed a theme around shortages that has been going on for months and is prevalent in many of the headlines today. It has also been a central theme of much of our energy transition work, as we think about the raw materials needed to meet the demand for solar and wind power as well as the infrastructure for hydrogen generation. The exception is lithium, where we see regular announcements around expansion projects, such as the one linked from Albemarle. The EV makers and battery storage manufacturers are doing an excellent job of encouraging investment in lithium, taking stakes in battery projects, and in some cases taking stakes in the lithium projects themselves. Offtake agreements also help projects get funding. We suspect that the offtake agreements are tactical – not aimed at buying out a source of lithium or a source of batteries but aimed at ensuring that a surplus of capacity gets built, to ensure no bottlenecks in the future.