Ore finds - 28 Jun 2024
S&P 500, batteries for arbitrage and green premiums (again)
In this week's ore finds:
1) Going off-topic to the S&P 500 which recently made a new all-time high with Fundstrat's Tom Lee making a bold price forecast
2) Ever heard of batteries used for arbitrage?
3) Do you know: green premiums are part of price bifurcation?
1) The S&P 500
Tom Lee made a bold statement of the S&P 500 reaching 15000 by 2030, mostly on the back of AI plugging the labor shortage gap. Obviously, with Nvidia having the last laugh as the supplier of chips.
I love his take on thematic drivers like technology prevalence and wallet penetration trumping over indicators like sentiment. To me, sentiment represents the loudest voice in the room, but not all the voices.
Finally, I have been thinking a lot about the profile of traders/stakeholders/investors each type of asset. The participant mix can really swing its volatility and liquidity.
Here's a case-in-point. SGX, which has been offering the iron ore futures for nearly a decade, reported a greater participation from retail and other non-commercial players that drove up open interest. Circling back to Tom Lee's point, the junior to mid-senior staff at financial institutions are probably more influenced by the pandemic and this era of high interest-high inflation rates due to recency effect. All in all, this can have an effect on trading decisions.
2) Battery and arbitrage
From this S&P Global article:
"Utilities now report that arbitrage is the primary use case for 10,487 MW of battery capacity, making it the most reported primary use," the EIA said. "In arbitrage, utilities charge batteries by buying electricity during low-cost periods and then sell that electricity when electricity prices increase."
It makes sense for power companies and traders to do cash-and-carry trades as energy storage technologies advance. Electricity from wind, solar or hydro energy is much cheaper and if excess can be stored for longer e.g., winter, periods of drought, this will avoid the substitution of energy from traditional sources like gas or coal.
Currently, if infrastructure is available, exports are more commonly seen than long-term storage. Yunnan is such a case.
According to a forecast analysis report released by the Kunming Power Trading Center on Feb. 16, Yunnan plans to export 145.2 TWh of electricity to southern coastal provinces in 2023, with another 4 TWh that can be exported or kept for local use. Yunnan exported 181.69 TWh of electricity in 2022, accounting for more than 40% of its total power supply, according to local government data.
Yunnan exports electricity to neighboring provinces under contracts. "These power transactions are fixed via long-term intergovernmental agreements, which should be given priority,"
I'll be keeping an eye out for energy storage adoption in the power and utilities sector.
3) What is price bifurcation?
Bifurcation is defined as the division of something into two or more parts.
In reality, metals pricing is indeed bifurcated into several parts - location premiums, quality premiums, freight, tax etc. Green premiums may be next.
As rightly pointed out in Oregon Group's conclusion, the West has to weigh the trade-off between cheap minerals with lower environmental standards and minerals charged with green premiums.
Currently, most initiatives are driven from the upstream, where miners are scrutinized from their mining locations, to LME benchmarks, to regulatory policies and tariffs.
What a time to be a miner.
It will be worth seeing a environmental tax on end consumers like the people who drive gasoline or diesel vehicles or the people who buy stainless steel kitchenware sourced from Indonesia. (The Biden administration is already taxing EVs made from non-eco-friendly sources under the IRA but this is a whole other discussion.) After all, the market goes where the money goes, and the money is with the consumer.
This is similar to the premiums (which arguably feels more like a tax) we pay for organic foods due to costs of organic certification and farming methods. So ask yourself, would you pay extra for organic foods? What about non-eco-friendly cars or gadgets?
As you can tell, I'm a believer of taxes rather than premiums. Paying more for something is a bigger disincentive than it is a push.