Glencore: An outlook for the world’s largest commodity producer

Rajinder Dhesi

This week the commodities giant Glencore announced pre-tax earnings of $14.7 billion for 2017, a 44% rise compared to the previous twelve-month period. Its share price has subsequently risen by up 22% to 399.3 pence (21st February 2018). There are several reasons for this strong performance. First, and perhaps most significantly, the renewable energy metal triad of copper, cobalt and nickel have seen incredible price growth over the last year. The price of cobalt soared by 130% from $32,000 to $75,000 on the London Metal Exchange last year, owing to a rising demand, primarily from electric vehicle (EV) manufacturers (each EV uses approximately 8 kg of cobalt per lithium-ion battery). Around two-thirds of the world’s cobalt production occurs in the Democratic Republic of Congo, a country in which Glencore operate almost as a monopoly; their only rivals being small-scale, independent mines who sell on to larger processors including Glencore. As a result, numerous automobile manufacturers, including Tesla and Volkswagen have been in talks with Glencore to secure supply of cobalt.

Supplementing this is Apple’s announcements last week that they are looking to secure several thousand tonnes of cobalt directly from miners to be used in the supply chain producing Apple products. Glencore are likely to be a large beneficiary of Apple’s investment, given that the technology giant requires both a vast supply of cobalt, as well as an ethical supply chain – the operations of smaller mines would be far harder for Apple to observe and manage.

Away from the renewable energy boom, there are other reasons for Glencore’s bullish forecast. Glencore have stuck with their coal portfolio – an industry which major competitors such as Rio Tinto have divested from. Thus, in the short term, Glencore have benefited from a 30% rise in the price of coal over 2017. The other arm of Glencore’s operations, trading, has also experienced remarkable growth, with pre-tax earnings up to $3 billion, the largest sum since before the financial crisis.

Hints at Glencore’s future plans also evoke optimism. Large earnings have produced the company’s highest ever free cash flow of $2.3 billion. Simultaneously, this has allowed a repayment of the company’s debts, higher dividend payments to shareholders and a number of possible acquisition opportunities for Glencore. Most notably, Glencore are looking to expand their operations into agriculture through the acquisition of Bunge Ltd., a grain merchant trading on the NYSE.

However, analysts still warn of uncertainties for Glencore. Proposed new laws will have the potential to reduce Glencore’s earnings through taxes, though the extent to which this will have an impact is unknown. Adding to this, current research into lithium-ion batteries has the possibility of wiping out the need for any cobalt. This is certainly being incentivised by the recent drastic cobalt price increases.

Despite some levels of uncertainty, Glencore have a strong foundation based on renewed future growth given the surge of interest in EVs, as well as the company’s own strategy of reducing debt and diversifying through acquisition. This makes Glencore a good company to buy shares in for investors.

The digital Gold Standard?

Richard Holland

Amongst the backdrop of Bitcoin and cryptocurrencies, a London-based FinTech company has teamed up with Lloyds Banking Group and MasterCard to bring the world’s oldest currency back into the digital age: gold.

In November 2017, Glint launched its multi-currency account, app and card that allows customers to use gold to buy goods and services, settle debts and send money to their friends and family.

The way the app works is as follows: once you have successfully created an account, you will then be able to top up your account with Pound Sterling. You can then either chose to leave your money in Sterling, or convert it into gold at 0.5% above the spot price and have it stored in allocated accounts within secure vaults in Zurich (for which you are charged a flat fee for this privilege). When it comes to using your card to pay for items, it works in the same way as any other MasterCard would, but you can choose which ‘wallet’, either the currency or gold, you would like to spend from. Glint automatically converts the gold into the desired currency in real time to provide a frictionless method of using gold to purchase items.

The company was co-founded by Jason Cozens and Ben Davies who have become increasingly disenchanted with our current monetary system. Since the Pound was untethered from the Gold Standard in 1931, the value of a £10 note now solely relies upon its widespread acceptance in society as a medium of exchange. Yet if a shopkeeper one day refused to accept your £10 note, your money would become worthless as you would not be able to trade it for anything. When the UK was part of the Gold Standard, you could have exchanged your £10 at the bank for its equivalent in gold, a physical asset with which to trade. Nowadays, money has no inherent value and it is in fact a social construct that humanity, either sub-consciously or consciously, has chosen to live by.

The benefit of Glint, as Jason Cozens the CEO reasons, is “gold can’t be wiped out, devalued or corrupted” which is in contrast to our current monetary system. They believe that central banks have been able to print money at will to fund overspending that has led to the global economy staggering from an ever-bigger boom to an ever-bigger bust and Davies, the COO and co-founder, believes that people are starting to realise that something is fundamentally wrong with our monetary system.

The focal point of Glint’s advantage over cryptocurrencies is that it has a tangible backing in the form of gold which bitcoin does not. Davies also believes that bitcoin is of little use as a currency – with extremely high volatility, lengthy transaction times and steep fees, it is nearly impossible to use as a means of exchange. Yet gold is renowned as being a hedge against stock market volatility and with access to the spot price of gold being readily available, the transaction times with Glint should be momentary at worst.

Glint will certainly have its critics, but to date the FinTech company has raised £6.1 million with significant backing from Bray Capital and other high profile individual investors. In 2018, they plan to launch the app for Android users as it is currently only available on the iOS platform, as well as adding a wider range of currencies to the ‘wallet’ too. Glint may still be in its infancy, but it is certainly a company worth watching.

China’s green energy revolution?

Rajinder Dhesi

China, the world’s largest energy consumer, has recently announced a new strategy to wean itself off its dependence on fossil fuels, which for the last two decades have powered the state’s unparalleled economic growth. Like other infrastructure projects, the scale of China’s foray into renewables is enormous; $136 billion was spent on renewable infrastructure projects in 2017, more than the total of the EU and US combined.

Few in China dispute the need to move away from fossil fuels. Despite being the world’s largest coal producer and holding the third largest reserves, since 2008 China has had to import coal to keep up with demand. Coupled with this, China in 2017 overtook the USA as the largest oil importer (importing an average of 8.4 million barrels per day). The reliance on overseas imports leaves China’s future economic growth vulnerable to future commodity price fluctuations, particularly as the price of oil increased steadily during 2017 due to OPEC supply cuts. Moreover, there is a growing political consensus in Beijing to reduce fossil fuel usage. The expanding and urbanised middle class do not want to see their cities polluted. Nor do rural citizens, who have violently protested the construction of new coal fired power stations that are viewed as the cause of much illness and damage to the ecosystem. There is also a limit to the efficiency of coal; currently on average 38.6% of the heat generated from coal is transformed into electricity and with large scale investment the most efficient coal power generators are only 44% efficient. Consequently, China’s National Energy Administration (NEA) cancelled the construction of 103 new coal power plants in January 2017.

China’s conversion towards renewable energy began with enormous hydroelectric dam projects, such as the Three Gorges Dam on the Yangtze River; in 2015, hydroelectric contributed 20% of the nation’s energy demand (second to coal). However, though hydroelectricity has significantly contributed to a decrease in fossil fuel usage, there are a finite number of potential future sites for damming and each construction project is accompanied with huge costs and negative environmental outcomes.

Instead, solar technology is the largest growing renewable sector in China. Installations of photovoltaic cells totalled 126 GW in 2017, up 66% from the previous year. China, through its multitude of state owned enterprises (SOEs) and government coordinated private companies, have began to export solar cells abroad, giving Beijing another boost in its aim to become the world’s largest superpower. However, the governments of two of the largest potential markets (India and the USA) have responded by setting tariffs of 30% and 70% respectively. On a long-term basis, China has announced aims to ban fossil fuel powered automobiles and replace these with electric vehicles.

Overall, there is still uncertainty and doubt lurking in this pro-renewable, anti-fossil fuel narrative in China. Despite a decrease in the percentage that fossil fuels contribute to the energy mix, the absolute usage of fossil fuels has and will increase (coal consumption is predicted to rise 140GW or 15% from 2016-2020), as China’s economy grows further.

What has become of North Sea oil?

Alexander Le Grys

In the past two months, there has been a certain buoyancy in the oil market. Brent crude oil prices reached below the $70 mark for much of January. As a result, 2018 looked to be a promising year for many oil-producing countries, particularly those that are not members of the Organisation of the Petroleum Exporting Countries (OPEC), like the UK and the USA. However, oil prices fell to their lowest in six weeks on Thursday 8th February, reaching $64.14 with a downward trend gravitating towards $60 looking very plausible for the remainder of the year.

Before the downward shift in the oil markets, the UK’s oil industry operating from the North Sea was optimistic. New fields had started production and large-scale projects were being written up, with Shell giving the green light to redevelop its Penguin field, its largest investment in the North Sea for over six years. In addition, costs have fallen with inefficiencies being ironed out. As prices are expected to remain around $70 for 2018 from the extension of OPEC cuts in 2017, the Treasury has predicted over £1 billion in tax contributions for this year. But, with the sudden turnaround in oil this year, will the UK and its oil industry see further pain that has been experienced ever since the huge price fall in 2014?

With the US aggressively drilling for shale over the past 6 months, the supply lag has caught up, thus counteracting OPEC’s supply cuts. Coinciding with this, a strong US dollar has also put downward pressure on oil because of the selling off effect on commodities it brings as a consequence. This has caused a realistic recognition that a resurgence in the British oil industry is unlikely due to the financial constraints on production preventing it from being economically viable. The trade body Oil and Gas UK predicts by 2025, 98 platforms will have been removed and more than 1,600 wells plugged. More worryingly, with an industry that experiences external economies of scale such as oil extraction, a ‘domino effect’ is always plausible. That is, when one company exits operating in the North Sea, leaving the incumbent firms to share a greater part of the cost of maintaining infrastructure, encouraging more firms to leave the North Sea.

With the supply dynamics still working against this market, and a constant underestimation of US output, crude oil looks very unlikely to replicate January’s movements. John Kilduff, a partner at energy fund Again Capital, has called for crude oil to pull back to $60 a barrel for the lion’s share of 2018. If this is the case, expanding output and investment in the North Sea will not be economically viable for UK firms. Nevertheless, last week BP announced the discovery of two oil and gas fields in the North Sea. In addition, there is almost half of original reserves left intact enhancing that investment in the long run is still wise providing the price of the commodity rises. For those that can manage production at $60 a barrel it is business as usual. However, it would seem foolish for the UK and its firms to expand and contribute to a bearish global oil market, for now at least.

Gold outlook for 2018

Veronika Tomilina

The price of gold has fallen in recent weeks from highs of around $1360 towards the end of January. In this article I will discuss whether this downward trend will continue, and also consider the main factors that will influence gold price in 2018.

2018 is promising to have multiple rate hikes by different central banks around the world.  Monetary policy is an important instrument that has an effect on gold. The US Federal Reserve looks set to hike interest rates three times this year, the Bank of England could raise interest rates once or twice, whilst the ECB looks set to end their quantitative easing programme by September. All of these monetary policy changes will further influence their respective currencies and gold.

There are two other factors that may influence gold prices. Firstly, the US dollar has weakened by 10.5% under President Trump’s tenure, and any further depreciation would tend to raise the price of gold. Also, equities performed strongly in 2017, which pushed the price of gold down; however, from the beginning of 2018 we have witnessed large corrections in the market and if this trend continues, it will benefit Gold.

Physical market drivers are another important factor for the gold price, and out of these income growth is one of the most vital.  Most emerging markets economies are predicted to see their growth accelerate in 2018, for example India and Brazil. Also, China is predicted to maintain its growth rate over the last few years of around 6.5%. As India and China are the world’s two largest gold markets, stable economic growth will benefit gold.

Trading indicators show that traders around the world are buying gold more than selling, which is a bullish market indicator and pushes prices up. Technical analysis by many analysts is predicting gold to rise as well.  The trading range of the gold price continues to squeeze tighter and tighter on a monthly basis, a technical sign that implies a breakout is coming. The technical analysis cannot predict when it will happen, but it shows that gold should go up at some point. Moreover, there are some rumours about the decline in gold supply from mine production, which will push the price up.

There are some factors however that could decrease the price of gold. For example, unexpected rate hikes with no increase in inflation will push the price of gold down.  Also, if the equity markets can repeat their performance in 2017 this would have a negative effect on gold.

Overall, on balance, it appears that the gold price will rise in 2018. However, this is completely dependent on economic conditions that are notoriously hard to predict.

Can solar energy power the world?

Veronika Tomilina

There is a big shift currently towards renewable energy and away from fossil fuels. Governments are introducing new legislation to reduce carbon emissions and providing significant subsidies for renewable energy production. In this article, I want to discuss the development and usage of solar panels.

Just 254 km of solar panels in the Sahara Desert could power the entire world’s energy needs. The development of battery technology is allowing us to save energy to meet demand at peak periods and at night when solar power production stops. Solar power is now cheaper than coal and natural gas, and it is predicted to be the lowest cost renewable option in the long term.

According to the International Energy Agency, the global solar panel energy capacity is 300GW. This year it is predicted to increase by 100GW.  As solar panel technology pushes into the ‘mainstream’, production costs are expected to fall, and falling prices for solar panels should raise demand further.

Solar panels are already a big competitor to the largest forms of energy production such as coal or gas. Over this century, the growing percentage demand met by solar energy is expected to benefit countries with warmer climates. Saudi Arabia is already investing $7bn this year into renewable energy, with a flagship project of a new solar panel plant with a capacity of 4.125 gigawatts.

Copper: time to be taken seriously

Alexander Le Grys

After a brilliant year for copper, 2018 so far has not matched the upward trend experienced in 2017. On 28th December copper reached its highest price in almost 4 years, and a 30% increment on the previous year. Copper has had a poorer performance in January though, sinking below $7,000 a tonne on 23rd January.

In the past two weeks, there has been a relatively large sell-off, particularly from China, with investors cashing in on profits assuming that the red-metal has peaked. The sell-off also hit mining stocks, which were among the worst performers in the FTSE 100. Anglo American dropped 3.9% to 1,723p, while Glencore slipped 2.9% to 390.75p.

However, this is unlikely to set the tone for the rest of the year. Copper is set for another bullish year, and that success may go on for a while. On the demand side, the price for metals is often said to be linked to global economic growth. This is particularly the case for metals that are widely dependent for physical use. Copper is used as a conductor as well as for building materials; compared to precious metals that are often used primarily as a financial hedge. For the first time since 2010, the world economy is outperforming predictions. Looking to the near future, Goldman Sachs’ outlook for 2018 expects this to continue with their global GDP forecast at 4.0%, up from 3.7% in 2017. The developed markets are finally continuing their pre-crisis trends with the US and the Eurozone predicted 2.5% and 2.2% growth respectively. This buoyant forecast carries over to emerging markets with a forecast of 5.6% growth; India is at the forefront of this trend, with a forecast of 8%. Thus, with global output expanding, the price of copper should follow, especially due to the common supply lag for base metals (copper, lead, nickel and zinc).

In addition, specific to copper, demand is expected to rise from an expansion in the deployment of renewable energies in 2018, which copper plays a pivotal role in. Since copper is a particularly efficient thermal and electrical conductor, it is the first choice for transporting the energy harvested by renewable generation. Growing wind and solar markets are finally reaching the scale and scope to expand exploration of new technologies that show potential to further reduce costs and spark growth. China alone plans to invest £292 billion in renewable power generation by 2020. Furthermore, a long run view suggests copper will become a more meaningful material to consumers across the globe with the explosion in electric vehicles (EVs). Copper once again plays a vital part in this ‘green’ technology, with plug-in EVs and battery EVs using 132 lbs and 183 lbs of copper respectively, compared to 18-49 lbs used by our current conventional cars. By 2035 there could be 140m EVs on the road (8% of the global fleet), versus 1m today. Manufacturing them could require at least 8.5m tonnes a year of additional copper, about a third extra on top of the current total copper demand.

On the supply side, for the short-term, copper is facing a potential labour bottleneck. Citibank estimates that around 30 sets of labour contract negotiations will take place over 2018, the bulk in South America. This could affect up to 25% of global supply due to South America’s dominance in world copper output. In the long run, as with any metal that needs to be mined from an ore, copper has lengthy lags and is often playing catch-up with demand. By one estimate, it takes at least 30 years from finding copper deposits to producing the metal from them at scale. Some of the big ores in operation today were discovered in the 1920s.

The position for copper looks very strong, both in the short and long-term, and the poor month of January should not dampen its forecasted position. It appears investors should start looking at copper more seriously as a commodity. At a price just under $7,000 a tonne, it would be a great time to buy into it, although it may take time to see extensive gains.

If the cryptocurrency bubble bursts, could gold once again be king?

Rajinder Dhesi

Bitcoin is undergoing a steep decline in value; last week, the leading cryptocurrency lost 50% of its value compared to its 2017 peak ($19,783 on December 17th). The wider cryptocurrency market has been bearish, with Ethereum, Ripple and Litecoin all experiencing double-digit losses compared to their peak values last year. Meanwhile, gold is experiencing a rally, trading at $1325.97 per ounce – its highest value in four years.

Analysts suggest that gold is being used as a form of hedging by investors to act against price swings in the crypto markets. After all, when political events have caused market uncertainty, hedging in the metal markets has been perceived to be a sensible investment option.

A significant factor contributing to Bitcoin’s recent demise is the South Korean government’s raids on coin exchanges in response to tax violations and even mentions of potential banning of all cryptocurrency trade. This second proposal has real bite, given that South Korea is the third largest Bitcoin market globally (after Japan and the USA). However, South Korea may only be the tip of the iceberg, with the USA, Japan and China all planning to tighten cryptocurrency regulation. This is in response to market manipulation in coin exchanges, where some investors mass purchase coins to cause price surges that tempt other potential investors. The initial investor then quickly sells to make a profit, resulting in sudden price drops.

Intrinsically, some analysts are questioning the value of bitcoin. It is a currency with only ten years of history and in those ten years, its value has fluctuated wildly. Moreover, from a British perspective, investors are finding Bitcoin to be an illiquid asset, as UK banks make it hard to exchange Bitcoins into Sterling. The easiest route to convert Bitcoin into Sterling requires the use of European Banks, who are more favourable to Bitcoin transactions. This adds complexity and expense to the process.

In comparison, gold has been mined out of the ground for thousands of years, was central to global exchange rates during the Gold Standard and Bretton Woods regimes, and is a real, tangible asset. Gold investments are covered by anti-money laundering and counter-terrorist financial regulations when using futures, commodity indices or Exchange Traded Funds.

The gold mining industry has been implementing a wave of austerity measures aimed at streamlining and curbing losses acquired from poor acquisition deals and price drops in the 2012-13 period. This could induce higher profits for gold mining companies through lower expenditure and cause the price of gold to increase, as companies are less willing to put up the large sums of capital required to construct new mines or pay for better technology. On a long-term basis, analysts are suggesting the need to act with caution; though the total amount of gold ore left in the ground is highly uncertain, miners are being increasingly forced to extract ore of a lower quality. Current projects average 2.1 grams of gold per metric tonne of ore, but in five years this could fall to as low as of 0.8 grams of gold on average per metric tonne of ore.

To conclude, there is little certainty in the cryptocurrency market, making it a risky investment strategy. Therefore, investors may look to invest more heavily in gold – a commodity which offers a well-documented history and less risk. Though for this scenario to act out, investors would need to see gold prices to rise further, to at least above the $1400 mark.

2018: Oil Market Optimism

Shawn Lim

Last year saw the surprise increase in oil prices where the West Texas Intermediate (WTI) crude futures broke the $60 barrier in December 2017 and continued to increase ending at $66.15 a barrel on January 25th 2018. Similarly, the benchmark of Brent Crude finally hit the magical $70 mark on January 15th 2018 and held its price over the past week. Being boosted by healthy world economic growth, expectations of continuous production curbs extended through 2018 by Organization of the Petroleum Exporting Countries (OPEC), Russia and supporting allies, it is hard to see the price of oil coming down anytime soon.

However, oil prices retreated slightly on Thursday January 25th 2018 due to the dollar rebounding from earlier losses as U.S President Donald Trump said he wants to “see a strong dollar”, as opposed to the comments made by U.S Treasury Secretary Steven Mnuchin a day earlier who said he welcomed a weaken currency. This caused the currency to fall on that very same day. It was only after Trump’s comments that oil fell momentarily as the dollar rose as it made making dollar-dominated commodities more expensive for foreign currency holders.

Despite the momentary shift in prices due to currency, oil prices eventually went back up as the U.S Energy Department reported last week’s commercial oil reserves in the country which declined by 1.1 million barrels to 411.6 million, this meant that oil reserves are in the decline for the tenth week in a row.

The impact of oil cuts was further affected by Venezuela’s involuntary drop in production in the recent months and the only reason preventing the oil prices to skyrocket was the U.S growing output of shale oil. The U.S production will be expected to surpass 10 million barrels per day (bpd) by February and to some, might be a key indicator of a bearish market, but even so the consistent decline in oil reserves also tells us that the global supply is still rebalancing from the three-year glut.

Additionally, the nervous wait for the biggest IPO of Saudi Aramco, valuated to have a market capitalization of $1.5 trillion, provides a strong resistance to reduce oil prices by major oil producers. It was one of the goals of OPEC’s strategy that was strongly directed and influenced by Saudi Arabia and their ambition to value Aramco at $2 trillion, hiking prices in the short term in order to justify the high price tag.

In conclusion, a positive economic outlook and market optimism in rising oil prices seems to be what most people are wagering on right now. Although some bearish hopefuls might disagree and feel that the oil markets will reach a turning point, with shale technology pumping oil in insurmountable amounts. It eventually all comes down to whether the U.S can meet its production goals and reverse its dwindling reserves to keep up with the supply gap left by OPEC and its allies. Without doing so, demands will continually increase and the pressure of rising oil prices will be ever present throughout the year.

Bitcoin – a threat for future electricity consumption?

Veronika Tomilina

Bitcoin is currency that can be traded and held electronically. It has some advantage; you can transfer from person to person without involving financial intermediaries which usually charge commissions, you also can use it in every country and you do not need to think about exchange rates. Also, your account cannot be frozen and there are no arbitrary limits.

On 27th November, Bitcoin reached its new high of $10,000, up tenfold in just a year. When everything seems so perfect there should be some danger in this currency. This currency might raise many problems for banks and the financial system as it cannot be regulated; however, in this report I want to look at Bitcoin from another angle – how it affects the consumption of electricity.

Firstly, where does Bitcoin come from? The answer is quite easy, Bitcoin is made by mining. ‘Miners’ use a special platform to mine Bitcoins with mathematical algorithms. Anyone can do mining, and as miners need to secure transactions it means it is a fair, stable and safe network. In the beginning, miners were using computers and processors for these processes, but then they realised that graphic cards used for gaming were much better for this type of work. Graphic cards are faster, but they consume much more electricity and create much more heat than computers.

The popularity of Bitcoin increased so fast that more miners try to join network and use different types of graphic cards to mine. As more people are mining Bitcoin, and demand for it grows, there is a huge amount of electricity used not only for producing Bitcoin but for other cryptocurrencies as well.

According to Digiconomist, the estimated electricity power used for generation and transactions of cryptocurrency is now 30.14 TWh a year; this is 0.13% of total global electricity consumption, and this share is growing rapidly. Each individual Bitcoin transaction uses 300KWh electricity – which is enough to boil 36,000 kettles of full water.

Only in the past month Bitcoin’s electricity consumption increased by 30%. If it continued on this trend, then it will consume all of the world’s electricity by February 2020.

Even though Bitcoin is mined in places with cheap annual electricity costs, with an average cost of around $1.5 billion for electricity. The US average retail price per kilowatt-hour is 10.41 cents, which means using 28.05 TWh would cost $3.02 billion (£2.28 billion).

We need to think about what this means for our future. Consuming more electricity means even more damage from climate change; therefore, there should be new technologies developed for this kind of process, which will affect technological companies.

Bitcoin will affect markets in the future as its price grows. This idea seems very new and many people do not trust it, but this is a process of changing to something new. It could also arguably be described as a new bubble that is doomed to crash as the ‘Dotcom bubble’ did.