Wall Street Breakfast: A Look at Commodities

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Look at raw materials

Brazil’s Supreme Electoral Court has declared leftist Luiz Inácio Lula da Silva as the country’s next president. It was a somewhat predictable but close result, with Lula winner the first round of an election more than a month ago, betting on a return to higher social spending due to runaway inflation. During the election campaign, Lula positioned himself as a pro-democracy candidate by promising to reconnect with government institutions, while ending rising poverty and attracting foreign investors to reindustrialize the economy.

Background : During Lula’s first term from 2003, Brazil’s economy grew rapidly, mainly due to a lucrative trade partnership with China. The new cash flow was used to fund a new welfare program called Bolsa Familia to help millions escape the cycle of poverty, while other reforms were passed, such as raising wages minimum. At the end of his second term, Brazil’s GDP was the highest in its history and Lula’s approval rating soared to 83%.

Dilma Rousseff, a member of the Workers’ Party, was chosen to succeed him in 2009, but she never proved as popular as Lula. Early in her administration, global demand for commodities plummeted, leading to a recession in Brazil and criticism of its handling of the economy. She also faced corruption charges known as “Operation Car Wash,” which ultimately cost Rousseff his job and sent Lula to jail, and barred the latter from participating in the 2018 elections that propelled retired military officer Bolsonaro in power.

A new “pink tide”? Political change first described a move towards leftist governments in the late 1990s and early 2000s, which were bolstered by the commodity super cycle of the time. It even led to Brazil being included in the group collectively known as the BRIC countries, which emerging market investors saw as attractive due to their sources of raw materials and growth expectations. In recent years, a commodity supercycle has made a comeback and has already witnessed historic victories for the left in Peru, Honduras, Chile and Colombia. (5 comments)

Cereals in danger

Speculation has been building since the UN amused an investigation into Iranian drones used by Russia, but Moscow has officially withdrawn from the Black Sea Grain Initiative following an alleged Ukrainian drone attack in Crimea. The agreement was signed in July to maintain the flow of goods from Ukraine by easing the Russian naval blockade and reopening key ports. Over the past two months, nearly 400 vessels have exported 9.2 million metric tons of corn, wheat, sunflower products, barley, rapeseed and soybeans under the agreement.

Market movement: Wheat futures contracts (W_1:COM) jumped 6% overnight to $8.79 a bushel in Chicago, while corn prices (C_1:COM) rose 2.6% to $6.98/bushel.

“The next four months of winter, when fuel, fertilizer and food shortages will be felt most acutely in Europe and neighboring parts of the Middle East and Africa, is the only window of opportunity who remains in the Kremlin to break the will of the European Union to support Ukraine,” said Michaël Tanchum of the Middle East Institute.

Reactions: Ukrainian Foreign Minister Dmytro Kuleba said Russia was using the attack as a “false pretext” to block the “grain corridor that provides food security for millions of people”. President Biden called the decision is “outrageous”, saying it would increase global starvation, while Secretary of State Antony Blinken has accused Moscow of weaponizing food. NATO and the EU have also asked the Kremlin to reconsider its decision. (5 comments)

Energy boom

The breathtaking size of the latest Big Oil quarterly profits – nearly $31 billion combined by Exxon Mobil (XOM) and chevron (CLC) – has revived calls from politicians and consumer groups to impose more taxes on businesses or restrict gasoline exports. According to Bloomberg, Exxon Mobil, Chevron, Shell (SHEL) and TotalEnergy (TTE) are even paying nearly $100 billion to shareholders each year in buyouts and dividends while reinvesting just $80 billion back into their core businesses this year.

Instantaneous: President Biden chastised oil companies for high revenues and accused them of abusing motorists, while singling out Exxon after Friday dividend increase. “I can’t believe I have to say this, but giving profits to shareholders is not the same as lowering prices for American families,” he tweeted. “These excess profits are going to their shareholders and their management instead of driving down prices at the pumps and providing relief to the American people, who deserve and need it.”

Senate Majority Leader Chuck Schumer also called the revenue “inadmissible,” while Rep. Ro Khanna (D-CA) introduced legislation prohibiting US gasoline exports whenever the domestic price (over the previous seven days) averages at least $3.12 per gallon. That was the average cost of gas in 2019, before the coronavirus pandemic and Russia’s war in Ukraine.

Answers: Exxon CEO Darren Woods devoted two pages of prepared remarks during the company’s earnings conference call detailing why the EU’s windfall taxes on the energy industry will increase energy prices for consumers in the long run. Chief Financial Officer of Chevron Pierre Breber reiterated that “taxing production will only reduce it… If you increase the costs of energy producers, it will reduce investment, which defeats the intention of increasing supplies and making the more affordable energy. On the other hand, Shell (SHEL) CEO Ben van Beurden said the energy industry should “embrace” the “societal reality” of higher taxes to help struggling parts of society. (217 comments)

Metallic battery cartel?

Countries that will play a key role in the energy transition are trying to extend their influence, such as Indonesia, which is the world’s largest producer of nickel. Jakarta has already banned nickel ore exports since 2020 to develop its domestic processing industry – which sparked a WTO dispute with the EU – and plans taxes on exports of intermediate nickel products. Nickel and other key metals are needed for the widespread production and adoption of electric cars, as well as other “clean” technologies that rely on batteries.

Quotation: “I see merit in establishing OPEC to manage the governance of oil trade to provide predictability for potential investors and consumers,” Indonesian Investment Minister Bahlil Lahadalia said. FT. “Indonesia is exploring the possibility of forming a similar governance structure with respect to the minerals we have, including nickel, cobalt and manganese.”

This can be a complicated task given that the country relies heavily on foreign investment instead of state-owned or domestic companies. Other global producers are also expected to be associated with any potential alliance, while Indonesia is still in the early days of its ability to supply battery-grade nickel. Most of its exports are currently destined for the stainless steel market, as it builds its processing facilities and high-pressure acid leaching plants.

Statistics: According to the raw materials consultancy CRU, Indonesia generates 38% of the world’s supply of refined nickel and stores a quarter of the world’s reserves of this metal.

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