Wealth Outlook 2024 - Slow then grow

91 Wealth Outlook 2024 | Unstoppable trends OPEC's unlikely role in the energy transition Unexpected investment implications We see a range of major beneficiaries of OPEC’s decisions. Near the top of the list (and No. 3 on Our top 10 high conviction potential opportunities on page 54 ) are Western energy producers. These companies, which are not acting as the supply shock absorbers for marginal oil demand, are clearly benefitting as they produce at full volume. Green energy producers with strong balance sheets can also see opportunity – eventually. Despite the surge of large-scale investments into green energy over the past few years, substantial profitability among green energy producers remains elusive. Much of the reason has to do with a very different supply- demand dynamic associated with producing green energy. With a primary input that is essentially free, all the economics are geared toward producing and selling the output at the cheapest cost possible. This requires large amounts of capital for infrastructure. And with today’s high interest rates, that has become more expensive and harder to come by. Some companies, through sheer dint of their size and regulated rate bases, can eventually get back to generating consistently respectable returns. They’ll do this by becoming a cleaner version of an electric utility. Still, that’s not an individual idea of a vehicle for short or even medium-term growth. Substitutes for the green technologies Higher up on the green energy value chain are the producers of the technology used in green energy production. In recent years, some of these companies have produced impressive earnings and share price growth. This is largely a high-scale, low-margin business. A handful of producers in China dominate the markets for solar panels and electric batteries, so that few other companies in the world can compete. Investment in these leading producers is caught up in the geopolitics between China and the US. So, while there will be higher-beta opportunities in specific technologies like green hydrogen or new battery chemistries, it’s not yet clear who the winners will be. Copper connects us to a green future For these reasons, in addition to Western energy producers, we favor irreplaceable inputs. We especially like copper, a commodity that, like oil and gas, benefits from natural supply constraints, but with much more durable, now-booming demand (see No. 4 on Our top 10 high conviction potential opportunities on page 54 ) . For the foreseeable future every aspect of the global thrust toward electrification will require increases in global copper production and recycling. In contrast, lithium, the highest-value input in today’s leading battery chemistries, also benefits from near-term demand pressures but could increasingly face substitution risk as rival technologies emerge. Sodium could eventually crush lithium on price and availability. The only other metal able to compete with copper’s conductive powers, meanwhile, is silver, which is considerably more expensive and rarer. Beyond that, the next threat on the horizon would be the first generation of commercially available room- temperature superconductor materials, decades from now, at the earliest. By then, OPEC should be nearing the final phases of its exit from the center stage of global supply and demand, by which time all of us – investors and humans alike – could owe it an enormous debt.