HC Insider Insights - The Super-Cycle Effect: Convergence, Correlation & Volatility
Category: Insights

The Super-Cycle Effect: Convergence, Correlation & Volatility

As the year 2022 begins, the super-cycle that emerged in the energy and commodities trading sector in 2021 is expected to persist in the short to medium term at least. The sector continues to face high and volatile prices as it remains exposed to multiple crises and drivers that have been unfolding since the global coronavirus pandemic broke out in 2020 – if not years before. As explored in HC Group’s 2021 Market Review & 2022 Outlook, the convergence of these drivers created several risks and opportunities in 2021, forcing companies to adjust their business plan and shape innovative talent strategies against a limited pool of designated talent and skillsets.

Structural issues

The year 2021 did not just give more visibility on the impact of the pandemic on global economies, industries, and populations – or at least a glimpse of it for now. It has further revealed the consequences of some underlying, structural issues that have been building up over the past decade. On top of the list is the lack of investment in new production capacity for oil, gas, and key metals such as copper and lithium. Pent-up demand in key regions after COVID-related restrictions were eased from spring 2021 stretched an already fragile supply and demand balance, highlighting supply chain vulnerabilities and resulting in record-breaking commodity prices.

Economic and redistributive policies also represent a key demand driver, as explained in one of HC Insider’s Podcasts based on a debate led by Paul Chapman, Managing Partner at HC Group, during the Reuters Events Commodity Trading 2021 online conference last November. As the economy continued to recover from the effects of the pandemic (albeit unevenly), metals prices in 2021 for instance were also underpinned by government stimulus packages and infrastructure investments - especially in electricity and power plant projects in developing countries.

Energy transition & ESG pressure

Arguably, the challenges faced by the metals & mining sector best exemplify the convergence of such overarching drivers, not least because of the wide range of metals and products they encompass and consumer segments they cater for. Beyond the short-term effect of supply chain chokepoints and tight production capacity, the energy transition and inherent demand growth for battery metals to support the electrification of road transport will continue to weigh on the supply and demand picture, as evoked in another of HC Insider Podcasts entitled Lithium and the Global Battery Arms Race.

In addition, mounting pressure to meet environmental social & governance (ESG) corporate targets, reduce exposure to polluting fuels like coal whilst making the most of opportunities offered by the energy transition is also forcing companies to become agile and redefine strategies and take positions in new segments or adjacent markets. For instance, Anglo-Australian group Rio Tinto announced in late December that it had acquired the Salar del Rincon lithium project in the Salta province of Argentina from private equity group Sentient Equity Partners for $825mn. The move forms part of ambitions to expand into battery metals, according to observers - most of Rio Tinto’s revenue has come from iron ore so far.

Spreading risks

Meanwhile, the imperative to reduce the carbon footprint across the commodities’ value chain means managing reputational risks has become highly strategic in increasingly consumer-centric markets. Many oil and gas companies rebranded their businesses to be seen as wider, more versatile players in the shifting energy space and reshape relationships with clients in a customers’ space that is becoming increasingly diverse and competitive from residential, retail, to utility segments.  

While investment in oil and gas remains very much on the cards for many of these players, international oil companies have been diversifying into renewables, electric vehicles, as well as biofuels such as Sustainable Aviation Fuel (SAF) and biodiesel.

Carbon trading both on compliance and voluntary markets is also attracting new entrants as companies’ further sophisticate their sustainable corporate strategies and seek to take advantage of improved liquidity on these markets. In the aftermath of COP26 in November 2021, the sealing of Article 6, which governs the rules for carbon credit voluntary markets, was described as a major step in that direction.

With companies expanding their portfolio of products, increased complexity on traded markets and shifting risks linked to climate change issues, new regulation and extreme price fluctuations such as those seen during the Big Freeze in Texas in February 2021 highlight the need to sophisticate corporate functions like technical accounting, tax, specialist legal services in mergers & acquisitions (M&A) and financing, for example, and in compliance and regulatory affairs.

Transformation & Digitalization 

Strategies to spread risks through new traded, ‘greener’ products and market diversification is leading to more correlation between commodity sectors. For instance, growing interest in biofuels also means increased interplay between energy players and the agricultural sector, consolidating existing synergies in the supply chain when it comes to feedstocks trading strategies.

To an extent, it can be said that that current market forces combined with the effects of the pandemic and the transition to a low carbon future are accelerating the transformation of traditional, vertically-integrated business models in the energy and commodities’ markets, amidst the rapid transformation of key markets like the electricity sector. As a prime example, the higher penetration of renewables, battery technologies and electric vehicles are increasingly decentralising the operating model of electricity distribution systems, notably through digitalisation and increased data leverage.

On this note, the growing involvement of major tech companies such as Microsoft and Amazon in commodities is resetting the entire industry, supporting the transformation of a wide range of corporate functions and purposes, from boosting revenue and operational efficiency, to supporting remote working and the decentralisation of trading operations amid persisting COVID-related risks. In agriculture, for instance, technologies, big data and genetics are revolutionizing farming, supporting the development of more sustainable products through the de-commoditization of the sector, as explained in this recent HC Insider Podcast entitled ‘Revolutionizing Agriculture: machines, software and genetics’.

Preparedness

The current super-cycle is likely to continue intensifying other underlying threats like geopolitical risks. Gas supply risks from Russia have been a long-standing threat in the context of perennial tensions with Ukraine, as explored in a recent HC Insider Podcast on Ukraine energy sector. But acute supply chain bottlenecks combined with disruptive market forces could further exacerbate such risks.

In the current environment & complexity, the focus of oil and gas majors, national oil companies, utilities, mining companies, trading firms, and hedge funds, has been on strengthening preparedness and resilience, whilst seizing opportunities offered by rapidly evolving markets and volatility. As such, this is also attracting new entrants on traded markets, and those who had shied away from this space, such as banks, are anticipated to return from this year. But as witnessed by HC Group over almost two decades now, talent strategies remain central and a paramount component in navigating unprecedented risks in the short to longer term. - FS

To receive HC Group’s 2021 Annual Review and 2022 Outlook and find out how the super-cycle’s overarching themes are affecting talent trends, please contact us at: hcinsider@hcgroup.global