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How Commodities Performed in H1 2017, and Why They’re Very Cheap

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If you’re looking for action, the commodities sector has traditionally been a good place to find it.

With wild price swings, massive up-cycles, exciting resource discoveries, and extreme weather events all playing into things, there’s usually never a dull day in the sector. That being said, it’s hard to remember a more lackluster period for commodities than in the last couple of years.

For commodity bulls, the good news is that the sector is no longer tanking. The bad news, however, is that all the recent action has been in relatively niche sectors, as metals like cobalt, zinc, and lithium all have their day in the sun.

At the same time, the big commodities (gold, oil, copper) have all slid sideways, having yet to revisit their former periods of glory.

Commodity Winners So Far

Before we highlight why commodities could still be cheap, let’s look at recent performance to get some context. Here are the commodities that have positive returns in H1 2017 so far:

Commodities with Positive Returns in 2017 H1

Palladium is the best performer in 2017 so far, and it has now almost passed platinum in price. That would be the first time since 2001 that this has happened, and for the stretch of 2007-2012 it was even true that palladium traded at a $1,000 deficit to platinum.

Agricultural goods like rough rice, lean hogs, oats, and and wheat have also gotten more expensive so far this year. Meanwhile, metals like gold, copper, and silver have seen modest gains – but these are only after dismal performances from the last part of 2016.

The Losers So Far

Here is the scoreboard for the commodities in negative territory, with the most noticeable losses in sugar and energy.

Commodities with Positive Returns in 2017 H1

Are Commodities Cheap?

From the post-crisis bottom in 2009 until today, the S&P 500 is up a staggering 215.4%.

During that same timeframe, most major commodities crashed and then went sideways. The Goldman Sachs Commodity Index (GSCI) is down roughly -31.2%, which is a strong juxtaposition to how equities have done.

This extreme divergence can be best seen in this long-term chart, which compares the two indices since 1971.

S&P 500 vs. GSCI

In other words: despite the lack of action in commodities that we noted earlier, the sector has never been cheaper relative to equities even going back 45 years.

That means that there could be some much-needed action soon.

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Energy

Visualizing China’s Energy Transition in 5 Charts

This infographic takes a look at what China’s energy transition plans are to make its energy mix carbon neutral by 2060.

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China Energy Mix

Visualizing China’s Energy Transition in 5 Charts

In September 2020, China’s President Xi Jinping announced the steps his nation would take to reach carbon neutrality by 2060 via videolink before the United Nations Assembly in New York.

This infographic takes a look at what this ambitious plan for China’s energy would look like and what efforts are underway towards this goal.

China’s Ambitious Plan

A carbon-neutral China requires changing the entire economy over the next 40 years, a change the IEA compares to the ambition of the reforms that industrialized the country’s economy in the first place.

China is the world’s largest consumer of electricity, well ahead of the second place consumer, the United States. Currently, 80% of China’s energy comes from fossil fuels, but this plan envisions only 14% coming from coal, oil, and natural gas in 2060.

Energy Source20252060% Change
Coal52%3%-94%
Oil18%8%-56%
Natural Gas10%3%-70%
Wind4%24%+500%
Nuclear3%19%+533%
Biomass2%5%+150%
Solar3%23%+667%
Hydro8%15%+88%

Source: Tsinghua University Institute of Energy, Environment and Economy; U.S. EIA

According to the Carbon Brief, China’s 14th five-year plan appears to enshrine Xi’s goal. This plan outlines a general and non specific list of projects for a new energy system. It includes the construction of eight large-scale clean energy centers, coastal nuclear power, electricity transmission routes, power system flexibility, oil-and-gas transportation, and storage capacity.

Progress Towards Renewables?

While the goal seems far off in the future, China is on a trajectory towards reducing the carbon emissions of its electricity grid with declining coal usage, increased nuclear, and increased solar power capacity.

According to ChinaPower, coal fueled the rise of China with the country using 144 million tonnes of oil equivalent “Mtoe” in 1965, peaking at 1,969 Mtoe in 2013. However, its share as part of the country’s total energy mix has been declining since the 1990s from ~77% to just under ~60%.

Another trend in China’s energy transition will be the greater consumption of energy as electricity. As China urbanized, its cities expanded creating greater demand for electricity in homes, businesses, and everyday life. This trend is set to continue and approach 40% of total energy consumed by 2030 up from ~5% in 1990.

Under the new plan, by 2060, China is set to have 42% of its energy coming from solar and nuclear while in 2025 it is only expected to be 6%. China has been adding nuclear and solar capacity and expects to add the equivalent of 20 new reactors by 2025 and enough solar power for 33 million homes (110GW).

Changing the energy mix away from fossil fuels, while ushering in a new economic model is no small task.

Up to the Task?

China is the world’s factory and has relatively young industrial infrastructure with fleets of coal plants, steel mills, and cement factories with plenty of life left.

However, China also is the biggest investor in low-carbon energy sources, has access to massive technological talent, and holds a strong central government to guide the transition.

The direction China takes will have the greatest impact on the health of the planet and provide guidance for other countries looking to change their energy mixes, for better or for worse.

The world is watching…even if it’s by videolink.

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Energy

Visualizing the Flow of U.S. Energy Consumption

From renewables to fossil fuels, we’ve visualized the diverse mix of energy sources that powered U.S. energy consumption in 2020.

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Breaking Down America’s Energy Consumption in 2020

The United States relies on a complex mix of energy sources to fuel the country’s various end-sectors’ energy consumption.

While this energy mix is still dominated by fossil fuels, there are signs of a steady shift to renewable energy over the past decade.

This radial Sankey diagram using data from the EIA (Energy Information Administration) breaks down U.S. energy consumption in 2020, showing us how much each sector relies on various energy sources.

The Balance of Energy Production and Consumption

In 2019 and now in 2020, America’s domestic energy production has actually been greater than its consumption—a development that hasn’t taken place since 1957.

Last year’s numbers were severely impacted by the COVID-19 pandemic, seeing a 5% drop in energy production and a 7% drop in consumption compared to 2019. Total energy production and consumption for 2020 came in at 95.75 and 92.94 quads respectively.

The energy amounts are equalized and measured in quadrillion BTUs (British thermal units), also known as quads. A quad is a huge amount of energy, equivalent to 183 million barrels of petroleum or 36 million tonnes of coal.

So how is America’s overall energy production and consumption split between energy sources?

U.S. Energy Production and Consumption Share by Source

Energy SourcePercentage of U.S. Energy ProductionPercentage of U.S. Energy Consumption
Petroleum32%35%
Natural Gas36%34%
Renewable Energy12%12%
Coal11%10%
Nuclear9%9%

Source: IEA

America’s new margin of energy production over consumption has resulted in the country being a net total energy exporter again, providing some flexibility as the country continues its transition towards more sustainable and renewable energy sources.

Fossil Fuels Still Dominate U.S. Energy Consumption

While America’s mix of energy consumption is fairly diverse, 79% of domestic energy consumption still originates from fossil fuels. Petroleum powers over 90% of the transportation sector’s consumption, and natural gas and petroleum make up 74% of the industrial sector’s direct energy consumption.

There are signs of change as consumption of the dirtiest fossil fuel, coal, has declined more than 58% since its peak in 2005. Coinciding with this declining coal dependence, consumption from renewable energy has increased for six years straight, setting record highs again in 2020.

However, fossil fuels still make up 79% of U.S. energy consumption, with renewables and nuclear accounting for the remaining 21%. The table below looks at the share of specific renewable energy sources in 2020.

Distribution of Renewable Energy Sources

Renewable Energy Source2020 Energy Consumption in QuadsShare of 2020 Renewable Energy Consumption
Biomass4.5239%
Wind3.0126%
Hydroelectric2.5522%
Solar1.2711%
Geothermal0.232%

Source: IEA

The Nuclear Necessity for a Zero-Emission Energy Transition

It’s not all up to renewable energy sources to clean up America’s energy mix, as nuclear power will play a vital role in reducing carbon emissions. Technically not a renewable energy source due to uranium’s finite nature, nuclear energy is still a zero-emission energy that has provided around 20% of total annual U.S. electricity since 1990.

Support for nuclear power has been growing slowly, and last year was the first which saw nuclear electricity generation overtake coal. However, this might not last as three nuclear plants including New York’s Indian Point nuclear plant are set to be decommissioned in 2021, with a fourth plant scheduled for retirement in 2022.

It’s worth noting that while other countries might have a higher share of nuclear energy in their total electricity generation, the U.S. still has the largest nuclear generation capacity worldwide and has generated more nuclear electricity than any other country in the world.

Converting Energy to Electricity

The energy produced by nuclear power plants doesn’t go directly to its end-use sector, rather, 100% of nuclear energy in the U.S. is converted to electricity which is sold to consumers. Along with nuclear, most energy sources aside from petroleum are primarily converted to electricity.

Unfortunately, electricity conversion is a fairly inefficient process, with around 65% of the energy lost in the conversion, transmission, and distribution of electricity.

This necessary but wasteful step allows for the storage of energy in electrical form, ensuring that it can be distributed properly. Working towards more efficient methods of energy to electricity conversion is an often forgotten aspect of reducing wasted energy.

Despite the dip in 2020, both energy production and consumption in the U.S. are forecasted to continue rising. As Biden aims to reduce greenhouse gas emissions by 50% by 2030 (from 2005 emission levels), U.S. energy consumption will inevitably continue to shift away from fossil fuels and towards renewable and nuclear energy.

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