EDITED TRANSCRIPT
Daniela Jaramillo (DJ): Hello, my name is Daniela Jaramillo and I am the Head of Sustainability Solutions here at Fidelity International Australia. Today, I'll be taking over from Lukasz and I'll be talking about one of those topics that I have a little bit of a love -hate relationship, mining and commodities. Why hate? Well, as a sustainability professional, this sector has a very large environmental and social footprint. It's from human rights to work health and safety, carbon emissions, basically mining has it all. But at the same time, mining is at the heart of the energy transition and therefore it's key for net zero. So just to give everyone a sense of why it's so important, it takes seven times the amount of materials like lithium, copper, or nickel to factor EVs versus an internal combustion engine. As one of our mining experts put it, it's not only the scale of the materials that we need, but it's also the speed we basically need to replace 200 years of thermal energy in 15 years. So, the growth expected from transition materials comes from the scale and the size of the demand. So, for this discussion today, I'm joined by two experts in the area. We have Oli Hextall, Co-Portfolio Manager of the Fidelity Transitions Materials Strategy, who's also a PM of our Global Demographics Fund, and our local mining expert, Sam Heithersay, who covers mining in Australia. Thank you so much for joining us. Oli, let's start with you. So part of the thesis of investing in transition materials is the huge growth expected from these materials for the low carbon technologies and the speed at which it's meant to get there. However, we have seen that some of the tailwinds supporting the theme have been rolled back, for example, with the Inflation Reduction Act (IRA) and some recent news that we've heard about this in the US. Can you help us unpack this, please?
Oliver Hextall (OH): Sure, thanks, Dani. So, you're absolutely right. There has been a huge amount of speculation about this area recently and about how the energy transition will look going forwards with some people suggesting that it might actually be over completely. We obviously strongly disagree with this, but when we think about where it has come from, a lot of it is to do, we would say, with the new administration in the US, which has been very vocal about its dislike for climate positive initiatives and for policies such as the Inflation Reduction Act or IRA. When we look at this specifically on the IRA, which is a federal law signed by Joe Biden in 2022 that was hugely important for the transition because it provides for enormous investment into domestic renewable energy production and other decarbonisation initiatives. When we look at it, we think the new administration will very likely alter some of it. They have already frozen funding for most of it. However, much of this law is actually enshrined legally, so it's not easy to change. And we think it'll be almost impossible to claw back the funding that has already gone out, which is a lot. And we saw a big increase actually between the election and inauguration, big acceleration in the funds being deployed. Secondly, although some of it will change, there will still be winners and losers, we would say. So if you think about electric vehicles, subsidies there are very likely to disappear, we would say. But areas such as onshore wind or solar, we still think they make sense on their own without subsidies for the large part, so they should be okay. And also, I think people often forget that the US is not that important in the transition overall. Electric vehicles, for example, only US represents only around 10 % of that market globally. Then also, I think it's important if you look out around the world in Europe, high power prices are causing a major competitiveness issue there. That region is really struggling with that. So I think any forms of energy that they can provide at a low cost is absolutely essential and that will obviously include renewables. Europe's learned very recently how the risks of relying on external parties for energy can be with Russia and Ukraine. So I think any sort of more secure domestic energy will be very important for them and that the investment there will continue. If you look at China, which has led this transition for many years now, they continue to push ahead very aggressively with lots of the technologies and continue to exceed expectations. We think that will continue. And then also, although the transition is the core theme for our strategy, there are other areas that are driving demand as well, such as artificial intelligence or the build-out of economies around the world that are still developing, such as India.
DJ: Thank you, that's really interesting. And now I want to move, Sam, I want to get your take on that because I know that in Australia, some of the miners were hoping to benefit from parts of the Inflation Reduction Act or IRA. And I think everyone in Australia was excited when we heard about the Clean Energy Compact announced in 2023 and how that might help some of the miners here. So how would this impact these companies?
Sam Heithersay (SH): Sure, well, I think stepping back, the impact of the signing of the IRA will be more important for Australian miners in retrospect than the repeal of the IRA. And I say that because between the signing and the potential repeal, we have had commodity markets collapse in certain critical minerals like lithium and nickel. And we've also seen a number of other countries try to emulate what the US has done with the IRA and they are unlikely to be repealed in the same way. So in that way, the horse is already bolted. So there were a number of Australian miners you would hope to benefit from the IRA and the clean energy compact, which is essentially an agreement between Australia and the US to allow Australian miners in particular right access to the IRA subsidies and credits. And there were plenty of credits to be had. The IRA included US$369 billion of US incentives for clean energy. Part of this was a tax credit on the percentage of the EV. If a percentage of those battery components came from the US or a free trade partner. And Australia was particularly well positioned to supply these critical minerals. And we saw automakers moving upstream to secure that supply, particularly in lithium and nickel. General Motors signed an agreement with a small nickel company in Australia, Albemarle sought to expand its lithium refining capacity, but new supply was incentivized, markets became oversupplied, lithium and nickel prices collapsed. And so there's less urgency, even with the tax credits for these investments. And we've since seen Albemarle rollback expansion plans, and this nickel company has changed names and is now focused more on coal seam gas. So I don't want to over understate the importance of the IRA here. The IRA forced all governments to think more strategically about their critical mineral supply chains, and acknowledge one particular vulnerability, which was the dependence on China, who produced 60 % of the world's critical minerals and process 85%. Now, Australian listed miners certainly would have benefited from the realisation of this dependency. And they already have in the form of Department of Defence Grants in the US to the likes of Linus and MP Materials. The Department of Energy signed a billion-dollar loan for an ASX listed Lithium miner, where their mine is based in the US. So I think while the direct impact of the IRA repeal will be limited for ASX miners and already priced in to a large extent, The indirect impact of the IRA will continue to benefit critical mineral miners. And why is that? Well, I think it's because the IRA was just the starters pistol of a clean energy arms race of sorts. And it's since been copied by a number of other countries, including Australia with the ‘Future Made in Australia’. And so, I think this legacy will likely endure long beyond the repeal of the IRA to the benefit of ASX miners.
DJ: Great and thank you for raising the ‘Future Made in Australia’. I do want to come back to that. But now that we've kind of, what I'm hearing from you too is that even if policies like the IRA get rolled back, there's still multiple opportunities for transition materials from the rest of the world. And Oli, you mentioned something really interesting before, you talked about opportunities and getting India's growth and artificial intelligence. Can you just tell us little bit what that's about?
OH: Sure, yeah. So for us, the core driver of the strategy is and remains the energy transition, which we still think has a long, long way to run. But through the strategy, you do get exposure to several other demand drivers. One of those would be artificial intelligence, AI. We know that AI is extremely power consumptive, and so we'll add significantly to the demand pool for a whole range of technologies that require critical minerals, so whether that's semiconductors, batteries, obviously power. And we know specifically that AI data centres are more power consumptive than traditional data centres. We've seen recently how artificial intelligence becoming increasingly a strategic priority for governments around the world. Stargate Project in the U.S. obviously a huge investment there and it's becoming increasingly competitive following the Deep-Seek news earlier this year and it's a real race now between major players around the world. So we think that's a big driver of demand. Another area would be the continued infrastructure build out in emerging economies around the world and the urbanisation of countries such as India. If you look at India today and you roll things forward sort of 10, 20 years, the potential commodity demand from the full development of a country like that is absolutely enormous and will last decades and could be a major drive of demand across a range of different commodity markets. So effectively, we see demand drivers like urbanisation of Southeast Asia or artificial intelligence as competing for commodities that are already scarce in many cases and which are already having to deliver on this transition in energy. And that comes at the time when supply is getting harder and harder to deliver on as well. So whether that's because of natural geology of resources or through permitting delays is not getting any easier to extract these crucial commodities. So we think that combination of multiple demand drivers and an increasingly challenging supply backdrop creates a very interesting cycle, hopefully for a range of different qualities.
DJ: And just specifically on AI, we have heard from the tech companies an interest in pursuing nuclear energy. How do you think about that?
OH: So yes, nuclear or uranium specifically for us is a key part of the strategy is actually one of our largest exposures and we see that the ongoing demand for green baseload power has been very supportive for nuclear around the world. We've seen multiple Governments rolling back their issues with nuclear and committing to it going forwards, I think as you mentioned specifically for artificial intelligence this is an increasing area of focus as you said, we've seen lots of hyperscalers in the US concerned about where they will source their power from looking at deals with nuclear companies and looking at nuclear power. I also think it's very relevant when you think about the IRA. Everyone's very worried about what the new administration is going to do in this area, but there are several executive orders that specifically supported the rollout of nuclear power in the US. So I think that's another area where we see a nice offset to any particular headwinds to that development.
DJ: Right, and Sam thinking about first the opportunities within India and AI and then particularly with Uranium, how do you see that playing out for Australia?
OH: I think Australia is very well placed for all these trends, these themes, not just because of our proximity to growth hubs like India, but also a resource endowment that means that we can capitalise on trends like AI and increasing demand for nuclear energy. I think on India specifically, it's obviously growing very quickly in the order of 6 % GDP. The population of India overtook China's last year and we expect a significant growth led by an infrastructure catch up. But it's of course paired with fairly ambitious emissions reduction targets and emission intensity targets to reduce by 45 % by 2030. The emission intensity of its GDP net zero by 2070. So all this growth in a responsible way will still require significant critical minerals to power and Australia is well positioned for that. We already have agreements of cooperation in place highlighting that we have reserves of 21 of the 49 critical minerals identified by the Indian government. So I think we're well placed there. On AI demand, we're also well placed just generally because of our resource endowment. We have 10 % of the world's copper reserves. BHP estimate that the copper used in data centres will grow globally by six-fold by 2050. So that's from half a million tons on a 23 million ton base today to 3 million tons by 2050. So we're well placed as well, just from our resource endowment for that trend. And nuclear is very similar where the fourth largest producer, 8 % of the world's uranium, but we have a third of the world's uranium reserves. So we are all placed for a lot of these trends, not just because of our proximity to growth hubs like India and China, but because of our resource endowment that will ultimately be needed to fuel trends like AI and growing nuclear energy. So now moving to another topic that has been grabbing the headlines, and this is the topic of tariffs promised on commodities like aluminium and steel in the U.S.
DJ: Oli, what are you and other analysts seeing in terms of how this will impact global market flows and prices?
OH: Yeah, tariffs obviously have been a huge theme running into the election in the US and since the election in the US. And specifically when we're looking at some of the more recent ones around steel and aluminium where the administration has announced a 25 % blanket tariff on all imports into the US, I think obviously it has potential for huge implications for supply chains around the world. I would say, first of all, that these don't actually kick in until the 12th of March. So there is plenty of time for these to be altered. I think we expect there will be negotiations. We have seen tariffs recently threatened and then completely lifted. So I think there will be a lot of time for negotiation. Potentially won't be implemented as we expect. But if they do come in as currently planned, I think, you know, it could be very disruptive. So firstly, these metals that we're talking about have built up supply chains over decades, which are deeply integrated and they'll all have to be re-evaluated. This is obviously particularly the case in North America and Mexico, where often components, for example, into a car will cross multiple borders multiple times before being assembled into the final products. And it's especially relevant for a metal such as aluminium, where the US imports around 70 % of its final demand. So huge implications there. When we look at this with the analysts around what the impact is like to be on prices, we think the immediate impact will be to increase domestic prices in the US. We've seen that already with Midwest premium for aluminium, for example, and that just reflects the high cost of importing metal and the greater demand for locally produced metal. So that stands clearly to benefit domestic US producers of steel, like steel dynamics or aluminium, like Century aluminium. I think the losers will be producers outside the US, obviously, who export into the US, firstly because their product will be less competitive now, and secondly because I think we'll see material diverted away from the US to avoid the tariffs, and that will weigh on local supply and demand in those regions outside of the US so that their prices will probably fall. And so when we're thinking about the companies that might be losers in that regard, it would be those that export steel and aluminium into the US.
DJ: And so we know a lot of Australian miners have that exposure to aluminium. How are you thinking about that?
SH: Well, Australian aluminium producers are clearly lobbying for an exemption to the tariffs that are being proposed by the US government. We certainly got those exemptions last time similar tariffs were proposed. And so we're likely to see some form of agreement, but in any case, tariffs are generally a drag on global growth and that is going to be negative for the commodities that we export including aluminium, but it remains to be seen whether there'll be a direct impact because of the aluminium we ship into the US because we may well get an exception like we did last time. I think the Australian aluminium industry is contemplating its own existence in any case because we're trying to move this aluminium production onto cleaner energy sources and so global tariffs certainly don't help but at the same time we've identified it as a critical mineral for the transition and so it is likely to have life beyond this energy transition and any tariff that comes into place whether it's with an exemption or not.
DJ: So Oli, going back to inflation, you've been in Australia for now at three, four days doing a tour and talking to investors in Sydney and Melbourne. And one of the big reasons why investors are interested in investing in transition materials is because they see it as an inflation hedge. Why is that?
OH: Well, so for us, again, one of the attractive things we think about this area is that it gives you very pure exposure to the energy transition, but it has other characteristics as well. And when you look at, we think about the world today, you think about deglobalisation, you think about the tariffs that we've discussed already, you think about general trade barriers and sanctions. It's very likely this will lead to higher inflation. So I think it's very topical on lots of investors' minds at the moment and people are really thinking about their portfolios in light of higher and for longer inflation than seen certainly the last sort of 10, 15 years or so. So I think that's why it's top people's minds. And the important thing for us is that when we look at commodities, historically commodities have served investors very well during times of inflation and specifically natural resources equities have outperformed the underlying commodities as well during that time frame. When you think about mining, you think about commodities, if there is an inflationary impulse then cost curves will move up. That takes prices with them. And because mining companies are very operationally geared, that can have a big impact on earnings and can be particularly positive for producers at the lower end of the Costco, which is where we're focused. So we think that this strategy can provide attractive diversify within a broader portfolio with positive correlation to inflation, whilst also lower correlation to border equities and bonds.
DJ: Sam, I did promise that we were going to come back to Australia's version of the IRA, the ‘Future Made in Australia’. How have things changed? Because this was announced early last year and lots of things have happened since. So can you give us a sense of how you see this, and how you see the issue of tariffs in that context?
SH: Sure. Well, the Future Made in Australia policy aim to invest almost $23 billion Aussie over the next decade in renewable energy, advanced manufacturing and critical minerals, including production tax credits. But part of the reason for this bill, which was only passed last week, is to ensure that Australia has the supply chains in place to deliver on the Labour government's 43% emissions reduction target by 2030. But another key part of it is to ensure the resilience of that supply chain against disruption be it active conflict to a global pandemic or something like a trade war. So I think a trade war could well accelerate plans for Australia to shore up its clean energy and critical mineral supply chains, but we of course risk being caught in the crossfire. The US would like to see more ex -China critical mineral supply coming from Australia, but China remains our largest trading partner buying a third of all Australian exports. And China could suppress prices and therefore economic returns in a range of commodities that it dominates if it so chooses. So a trade war would probably highlight why we need a resilient supply chain, but it could also make it painfully obvious just how challenging that might be.
DJ: Excellent. So we've covered multiple topics. If we want to leave for one take away or one key thing to watch for, for our listeners, what would that be? I'll start with you, Sam.
SH: For me, it would be China's annual parliamentary meeting. The two sessions begins in March 4th. It will be interesting to see what the reaction is to the US tariffs, and it has significant implications for the Australian mining landscape. More locally, I would also say the Australian election, which has to occur before May 17th. The coalition is opposed to the future made in Australia policy and have their own views, notably on nuclear. So I think that will be an important date to watch for the outlook for Australian miners and commodities.
DJ: Oli?
OH: Yeah, so I think the US has to be one. There's obviously a lot going on there and it'd be really interesting to see how these tariffs do actually play out, how they settle down, what we actually are left with. Absolutely, that has huge implications for global markets and trade plays around the world. Also, what does happen with the inflation reduction act and other significant policies there. And then if I was to do a more local one for me as well as a European, I think we're very closely watching how the ceasefire plays out between Russia and Ukraine, obviously in negotiations at the moment. And it does have a lot of implications for several different commodities. Firstly, from the perspective of rebuilding Ukraine, as a huge amount of investment needs to go in there. And secondly, for Europe, it could have huge impact for power prices if some Russian product, for example, comes back into the market.
DJ: Excellent. Thank you so much for joining us today. Best of luck in your long trip back home, Oli. And we'll see you next time.
