Wall Street Breakfast: Eye On Commodities

Eye on commodities

Brazil’s Supreme Electoral Court has declared leftist Luiz Inácio Lula da Silva as the next president of the country, with 50.9% of Sunday’s vote going to the longtime leftist leader, compared to 49.1% for right-wing incumbent Jair Bolsonaro. It was somewhat of a predictable but close outcome, with Lula winning the first round of an election over a month ago, banking on a return to greater social spending due to rampant inflation. On the campaign trail, Lula positioned himself as a pro-democracy candidate by promising to rebuild ties with government institutions, while ending rising levels of poverty and attracting foreign investors to re-industrialize the economy.

Backdrop: In Lula’s first term starting in 2003, Brazil’s economy grew rapidly, mostly due to a lucrative trade partnership with China. The new cash flow was used to finance a new social welfare program called Bolsa Familia intended to help millions escape the cycle of poverty, while other reforms were passed, like increasing the minimum wage. By the end of his second term, Brazil’s GDP was the highest in its history and Lula’s approval rating soared to 83%.

Fellow Workers’ Party member Dilma Rousseff was picked as a successor in 2009, but she never proved to be as popular as Lula. Early in her administration, global demand for commodities dropped off their peaks, resulting in a recession in Brazil and criticism over how she managed the economy. She also faced corruption accusations known as “Operation Car Wash,” which ultimately cost Rousseff her job and sent Lula to jail, and prohibited the latter from participating in the 2018 election that vaulted retired military officer Bolsonaro to power.

A new “pink tide”? The political shift first described a move towards left-leaning governments in the late 1990s and early 2000s, which were bolstered by the commodities supercycle of the era. It even led Brazil to be included in the group collectively known as BRIC nations, which emerging market investors saw as attractive due to their sources of raw materials and growth expectations. In recent years, a commodities supercycle has been making a comeback, and has already witnessed landmark leftist victories in Peru, Honduras, Chile and Colombia. (5 comments)

Grain in jeopardy

Speculation had been building since the U.N. entertained an investigation into Iranian drones used by Russia, but Moscow has officially pulled out of the Black Sea Grain Initiative following an alleged Ukrainian drone attack in Crimea. The deal was inked back in July to keep commodities flowing from Ukraine by easing Russia’s naval blockade and reopening key ports. Over the past two months, nearly 400 ships exported 9.2M metric tons of corn, wheat, sunflower products, barley, rapeseed and soy under the agreement.

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

“The coming four months of winter when shortages in fuel, fertilizer and food will be felt most acutely in Europe and in nearby areas of the Middle East and Africa is the sole window of opportunity that remains to the Kremlin to break the European Union’s resolve 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” for blocking the “grain corridor which ensures food security for millions of people.” President Biden called the move “outrageous,” saying it would increase global starvation, while Secretary of State Antony Blinken accused Moscow of weaponizing food. NATO and the EU have also asked the Kremlin to reconsider its decision. (5 comments)

Energy boom

The jaw-dropping size of Big Oil’s latest quarterly profits – nearly $31B combined by Exxon Mobil (XOM) and Chevron (CVX) – has revived calls from politicians and consumer groups to impose more taxes on the companies or restrict gasoline exports. According to Bloomberg, Exxon Mobil, Chevron, Shell (SHEL) and TotalEnergies (TTE) are even paying nearly $100B to shareholders annually in the form of buybacks and dividends while reinvesting just $80B in their core businesses this year.

Snapshot: President Biden has scolded oil companies for their high earnings and accused them of gouging motorists, while singling out Exxon after Friday’s dividend increase. “Can’t believe I have to say this, but giving profits to shareholders is not the same as bringing prices down for American families,” he tweeted. “Those excess profits are going back to their shareholders and their executives instead of going to lower prices at the pump and giving relief to the American people, who deserve it and need it.”

Senate Majority Leader Chuck Schumer has also called the earnings “unconscionable,” while Rep. Ro Khanna (D-CA) introduced legislation that would ban American gasoline exports whenever the domestic price (over the prior seven days) averages at least $3.12 a gallon. That was the average cost of gas in 2019, before the coronavirus pandemic and Russia’s war in Ukraine.

Responses: 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 raise energy prices for consumers in the long run. Chevron CFO Pierre Breber reiterated that “taxing production will just reduce it… If you raise costs on energy producers, it will decrease investment so that goes against the intent of increasing supplies and making energy more affordable.” On the other hand, Shell (SHEL) CEO Ben van Beurden said the energy industry should “embrace” the “societal reality” of higher taxes to help the struggling parts of society. (217 comments)

Battery metal cartel?

Countries that will be key in the energy transition are attempting to expand their clout, like Indonesia, which is the world’s biggest nickel producer. Jakarta has already banned nickel ore exports since 2020 to develop its domestic processing industry – which has sparked a WTO dispute with the EU – and is planning taxes on intermediate nickel product exports. 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.

Quote: “I do see the merit of creating OPEC to manage the governance of oil trade to ensure predictability for potential investors and consumers,” Indonesian Investment Minister Bahlil Lahadalia told the FT. “Indonesia is studying the possibility to form a similar governance structure with regard to the minerals we have, including nickel, cobalt and manganese.”

It may be a complicated task given the fact that the nation heavily relies on foreign investment instead of state or domestic-owned companies. Other global producers would also have to be brought on board for any potential alliance, while Indonesia is still in the early days of being able to supply battery-grade nickel. Most of its exports currently go to the stainless steel market as it builds up its processing facilities and high pressure acid leach plants.

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

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