A Paradigm Shift in Energy, Trade-Supply Chain and its long term Economic Consequences for us

?The event of the last fortnight has reminded us that Geopolitics is now more important than monetary policy to the economic and financial outlook. Russia’s invasion of Ukraine is fundamentally inflationary at a point when price pressures in developed markets are at multi-year highs.?The world has experienced the breakdown of trade products, semiconductor chains in the last two years, now we have started experiencing the breakdown of the energy supply chain. The de-globalization of currency which started a few years back will accelerate and move to the trade sector.?As we are all the children of our own experiences, my reflection suggests that retooling of the portfolio is required in the changing economic scenario and?investors must adjust to a future in which Europe is dependent on imports of liquefied natural gas from the US and Middle East. Europe now faces paying?heavy premiums for energy denominated in US dollars, which are likely to become more expensive and harder to borrow.?

Today, Russia accounts for only 1.8% of world GDP, but it is the world’s largest natural gas exporter, second-largest oil exporter, and third largest coal exporter. This is a big problem for Europe; not so much for the US.?It is the world’s second-largest gas producer and third-largest oil producer, accounting for a global share of 17% and 12%, respectively. It is also?home to the largest gas reserves in the world.?The country produces?45% of the world’s palladium, 6% of the world’s aluminum. It is the?third-largest producer of titanium?after China and Japan, accounting for?13% of the market,?Supplying 7% of the world’s nickel.?This will allow it to?become the world’s fourth-largest copper producer, moving ahead of the U.S. and China.?Russia is the world’s leading exporter of all three main categories of fertilizers: nitrogen, phosphate, and potassium.?Russia is also a major exporter of natural gas, which is a key ingredient for fertilizer. Higher fuel and transportation costs add further upward pressure to fertilizer prices.?Russia and Belarus produce roughly 35% of the world’s potash for use in fertilizer.??Less fertilizer laid on the soil will result,?ceteris paribus, in lower crop yields in the summer.?Russia was the?second-largest producer of gold in 2020. S&P Global Commodity Insights wrote last year that if the country maintains its growth trajectory,?it will become the largest gold producer as early as this decade.?While Ukraine is?the?source of 90% of the U.S.’s supply of semiconductor-grade neon gas.?This is crucial for lasers that etch circuit designs into wafers to create chips. Russia is also the?5th?largest exporter of iron ore by volume and the 13th?largest producer of steel?in the world and is home to 250,000 technology professionals.?An economic sanction on such a dominant producer will disrupt the supply chain, significantly.

Energy Companies,?which are significant gainers have left the exploration in lieu of returning capital to the stakeholder under the pressure of?ESG compliances.?Gold, as the reverberation of the economic sanction and freezing of sovereign assets, has put the fear of god for central bankers. It will accelerate transition of the central banker and trade markets towards gold and other hard assets as exchange of medium. The only problem with the gold market is that it is worth US$12trn—small relative to global trade, which was worth US$28.5trn last year. This can lead to significant appreciation in the long run.?Uranium, which will be the key material for starting of nuclear power houses across the world, to fight the energy crises.?Chinese currency and companies?are the last standing buyers of distressed Russian oil, products and cut long-term favorable deals from disruption of trade. China will accelerate its self-sufficiency path.?Indian Energy companies,?exporters of energy-intensive products?to the world (especially Europe), assuming it has backward linkages to sources like coal, etc. MNCs?have a technological edge, pole position in the domestic market, and expanding horizon of export from India to the world will gain significantly due to lower steel, aluminum, and logistic cost relative to other parts of the world. The?transition to?EV?will pass through?lanes of?Compressed Natural Gas (CNG), thereby benefiting companies operating in this sector.

Losers are likely to be?Euro and Euro denominated assets?and companies which are going to suffer severe inflationary pressure, compression of consumer spending.??The de-dollarization of central bank reserves and trade will accelerate and this will fuel a further rise in commodity prices. FMCG companies will see further input price rise due to commodity and oil-based raw materials.??The economic consequence will lead to?political instability?in the food-importing countries (Egypt, Bangladesh, Pakistan, etc) which import basic products from many countries. It has been shown repeatedly in history that higher food prices or food shortages are one of the key causes, or at the very least a trigger, of social unrest.?Is this a coincidence that a drought in Russia and Ukraine in the summer of 2010 led to spiking food prices towards the?end of the year, sparking demonstrations and ultimately culminating in the Arab Spring??We all are bracing for a different world.

Manish Bhandari

CEO & Portfolio Manager

[email protected]