Stockholm (HedgeNordic) – Copenhagen-based fund boutique St. Petri Capital has been running a thematic-focused long/short equity fund since early 2018. The fund employs a long/short equity approach to identify and capitalize on structural trends shaping the future. One particular impactful structural change in today’s world is climate change and St. Petri has incorporated specific themes into its portfolio to capture opportunities arising from this transformation.

“Climate change is becoming ever more critical,” points out Johann Grøndahl, a seasoned investment analyst at St. Petri Capital. “One of the inevitable solutions to mitigate further destruction of our planet’s ecosystem and hopefully even reverse some of the damage is the transition towards a zero-emission world through renewable energy,” he emphasizes. In alignment with other investors, politicians and the broader public, St. Petri views the green energy transition as a key structural trend and an area for capital allocation in the coming decades.

“We currently operate with three themes related to climate change.”

“We currently operate with three themes related to climate change,” explains the investment analyst responsible for these themes. One of these themes, called ‘Green Energy Wave,’ focuses on companies directly involved in electrifying our society. Another related theme, ‘Transition Essential Resources,’ focuses on the input side of the equation, addressing the massive demand for raw and processed materials and commodities essential for driving the green transition. “Each in their own way, companies within these themes address the need to bring down carbon emissions to mitigate or reverse the climate change brought forth by humanity in the past century,” highlights Grøndahl.

Transition Essential Materials

St. Petri Capital’s ‘Green Energy Wave’ theme includes positions in renewable energy producers, green energy consumers and companies driving the transition to green energy such as technology enablers. “This is quite a big theme and can stretch across a variety of sectors and industries,” clarifies Grøndahl. “The ‘Green Energy Wave’ theme is not commodity-focused as such, but this theme drives demand for the commodities that we have exposure to in a separate basket, constituting the resources and materials needed for the green transition,” he elaborates. “The ‘Green Energy Wave’ theme drives demand for transition essential materials. We see it as an ecosystem with a reinforcing effect.”

“The ‘Green Energy Wave’ theme drives demand for transition essential materials. We see it as an ecosystem with a reinforcing effect.”

The adoption of green energy technologies reduces the cost of green energy, increasing the unit economics and demand for more green energy, further driving the need for technological advancements and more use cases for renewable energy consumers. “This spiraling effect further drives the demand for materials, given the materials-intensive nature of the green energy transition,” highlights Grøndahl. He underlines that commodities are indispensable for the green energy transition. “The ‘Green Energy Wave’ drives the demand for Transition Essential Resources and, as the name indicates, these resources are necessary to build the infrastructure for the green transition.”

“…the focus we have is copper given its intensive use in the green energy transition.”

Building the infrastructure for the green transition relies on various commodities, minerals, and materials. Some of the key commodities necessary include copper, nickel, zinc, lithium, and others. The team at St. Petri Capital views copper as the key material in the electrification of our societies. “The entire materials space, including nickel, lithium, cobalt, all of that is very interesting and we do see an increased demand for that,” says Grøndahl. “But the focus we have is copper given its intensive use in the green energy transition. We see the most favorable supply/demand situation for copper.”

Copper: Demand in Focus

Copper is renowned as the workhorse metal of the global economy, making it a highly cyclical and economically sensitive commodity. Over the past two decades, China, which consumes over half of the world’s supply of copper, has been the driving force behind the demand for this metal. China’s copper consumption, particularly in its building and construction sector, has significantly influenced the sentiment and pricing dynamics of copper. This influence, among others, explains the decline in copper prices observed in 2023. “What we have seen in the last 12 months is a downcycle in all commodities driven partially by the weak Chinese economy and slow reopening,” says Grøndahl.

The benchmark three-month copper contract is trading just below $8,500 a tonne on the London Metal Exchange, marking a ten percent decrease from the year-to-date peak in mid-January. The trajectory of copper demand is intricately tied to the resurgence of China’s property sector from COVID-induced slowdowns. Grøndahl, however, stresses that “the market ‘misses’ and is not pricing in the supercycle that the Green transition will bring.”

“the market ‘misses’ and is not pricing in the supercycle that the Green transition will bring.”

Copper, also referred to as the ‘metal of electrification,’ is essential to all energy transition initiatives. Deeper electrification requires copper. Technologies critical to the energy transition such as electric vehicles (EVs), charging infrastructure, solar photovoltaics (PV), wind, and batteries, all require much more copper than conventional fossil-based counterparts. While demand plays a crucial role, it represents only one facet of the story.

Copper: Supply in Focus

“The expected surge in demand, coupled with the quite clear visibility of copper supply from new mines or mine extensions or expansions currently announced, indicates a quite dire undersupply in the medium term – and it will be quite significant,” argues Grøndahl. The average time from initial exploration to actual copper output spans ten to 15 years. “Given the depressed levels of copper prices – the economics haven’t made sense for new investments, so miners have naturally held back,” explains St. Petri’s investment analyst.

“On a medium and long term horizon, copper prices must rise. It is a simple supply-demand question.”

While opinions on the extent of the supply deficit may vary, a recent Financial Times article suggested a deficit of 2.5 metric tons by the end of the decade. To put this into perspective, Chile, the world’s largest copper producer, produced 5.2 million tonnes in 2022. “Furthermore, permitting processes take time and governments have imposed stricter and more thorough regulations,” elaborates Grøndahl. “To make matters worse – the best mines have been explored and mined, leaving current and future mines with lower ore grades, making the unit economics worse and more expensive to mine,” he adds. “On a medium and long term horizon, copper prices must rise. It is a simple supply-demand question,” concludes Grøndahl. The potential supply-demand gap will be very large as the transition proceeds and accelerates.