Matt Fernley: Inflation is Structural, not Transitory
Tom welcomes Matt Fernley to the show. Matt is the managing editor of Battery Metals Review and Head of Research for Westbeck Capital’s Volta Fund.
Matt discusses how the green energy transition is impacting inflation due to moratoriums on oil and gas exploration. There is a general public impression that we won’t need as much oil due to electric vehicles. However, ICE vehicles will continue to be the majority for some time. Europe is very dependent on Russian gas for electricity and heating. A lot of analysts are predicting that oil could go much higher.
There are two issues with EVs. The first is their current cost and the underinvestment in raw materials. We’re going to see higher prices for all the battery metals much as we have seen with lithium.
The rise in energy prices is also having an impact on the cost of “refilling” electric vehicles.
Renewables are not a panacea because they do not provide baseload power. They only work when the sun is shining or the wind is blowing. To fix this problem you need large energy storage solutions and nuclear.
For the last twenty years, the western world has shifted its manufacturing base to China. China has now clearly shown that they have little interest in making low-cost materials for the West. Therefore, huge increases in operating costs are coming as we will need to build back our manufacturing industries.
Copper demand may be overstated as the world has already gone through significant structural changes in demand. Today’s consumer requires less in the way of products than in the past. Just consider all the functionality in a smartphone.
He gives a breakdown of the nickel market, the classes of metal, and the price movements in recent years.
Lithium is currently in very short supply and that is the cause of recent price action. He has reduced his EV production forecast because of the lack of available raw materials. He says, “If you want to de-carbonize you have to invest in primary metal production.”
Time Stamp References:
0:00 – Introduction
0:35 – ESG and Impacts
6:22 – Hidden Cost of EVs
10:29 – Renewable Issues
14:25 – Structural Problems
16:48 – Copper Perspective
21:23 – Western Growth
24:55 – Copper Picture
27:44 – Nickel Overview
41:28 – Lithium Market
48:13 – OEM Supply Contracts?
51:08 – EV Profitability?
52:17 – Raw Opportunities
54:27 – Wrap Up
Talking Points From This Episode
- Green energy and the consequences of moving too quickly.
- Electric vehicle cost comparisons.
- Why inflation is a structural problem and the pitfalls of overseas manufacturing.
- Overview of battery metals including nickel, lithium, and manganese.
Matt has spent over 18 years as an equity analyst, following the Mining, Chemicals, and Industrial sectors. Starting his career at Warburg Dillon Read (now UBS Investment Bank), he was an equity analyst and also a global strategist for Basic Materials (chemicals, mining, paper, steel, cement/aggregates). Latterly he was a global strategist for the Chemicals sector. While at UBS his primary focus was on the growth of India and China and the development of materials markets due to structural changes in demand. He used previous economic take-off events in the US, Japan, and Korea to model trends in materials demand in China and India. He was then able to apply this work to food and made one of the earliest calls in the market on the importance of fertilizers and agrochemicals in early-2005.
Following UBS, he spent two years in hedge funds before joining GMP Securities (Europe) LLP as a Senior Mining Analyst and latterly Head of Equities Research. After GMP he was head of a small online property company for two years, before taking up the position of Materials & Cyclicals strategist at Haitong.
Matt has published extensively on the Mining sector as well as the development of key materials and equity price trends associated with secular demand events in raw materials.