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Client Update - 11th March 2022

The war in the Ukraine continues, quite rightly, to dominate market headlines around the world and the stock markets have endured another week of ups and downs. The news on Tuesday that the UK and then the US were seeking to ban Russian gas and oil imports caused a strong rally in markets on Wednesday, but the relief was short lived.

With energy prices at record levels and the world starting to seek energy independence from Russia, we have seen that the geopolitical instability that we are seeing flare up is further adding to the case for renewable energy and the energy transition more widely. There are already reports (source: Deutsche Bank) that indicate that Germany is considering halting the planned phase out of nuclear power which is a significant change in direction of domestic politics. This underscores the importance that countries are already placing on energy independence as a result of the current crisis, of which domestically produced renewable energy is a part.

It is extremely sad that it has taken a war to really focus attention on the need for investment in the green transition, and that the threat of climate change was not enough. This further strengthens the case to invest in companies and themes that are cognisant of these factors and positioned to benefit from an increased focus on them.

Whilst commodity positions have been extremely supportive to our portfolios over the last month, it has not been good news for everyone. I read an article this week in the Financial Times about Chinese billionaire Xiang Guangda. He laid a large short bet (to make money if the price fell) on the price of nickel, on the London Metal Exchange. By betting against the price of nickel, he hoped to offer some protection for his company Tsingshan Holding Group, the world’s biggest nickel producer, against price volatility. But it could now face billions of dollars in trading losses after the market turned against him and the price of nickel rocketed. As Xiang scrambled to close his short positions, the nickel price doubled on Monday to more than $100,000 a tonne — five times its level at the start of this year.

The extraordinary surge in the nickel price underscores the turmoil that the Ukraine conflict is sending through commodity markets — with important implications for the energy transition. Russia is a key source not only of hydrocarbons, but also of several minerals that are crucial to the clean power sector. For example, in high-grade nickel, an important ingredient in electric car batteries, Russia produces about a tenth of the world’s supply. And with the doors of international trade now closing in the country’s face, prices have surged.

Analysts at Bank of America estimate that if nickel prices were to settle at about $80,000 a tonne — a level that would have seemed absurd a few weeks ago, but much lower than the price reached on Monday — then the cost of electric vehicle batteries would rise by nearly a quarter, and the total bill-of-materials cost for electric vehicles by almost a tenth.

As devastation continued to spread throughout the Ukraine, one of the iconic moments of the 20th century: thousands of Muscovites queueing in Pushkin Square for a chance to get their hands on a burger at Russia’s first McDonald’s, was recalled. Thirty-two years on, McDonald’s announced that restaurant would be closing for now, along with the rest of its 850 outlets in Russia, as companies continue to head for the exit. For now, McDonald’s will continue to pay the salaries of its 62,000 Russian employees. Like Starbucks, Pepsi and Coca-Cola, which all made similar announcements, it is calling this a temporary suspension rather than a permanent exit from Russia. Another important statement came this week from oil company Shell, which said it would no longer buy oil from Russia — and apologised for purchasing a cargo of Russian crude last week.

Some companies, however, have taken a different view. Danone chief executive Antoine de Saint-Affrique told the FT that the company has “a responsibility to the people we feed, the farmers who provide us with milk”; Tadashi Yanai, founder of Japanese fashion brand Uniqlo, says he is keeping his Russian stores open because “clothing is a necessity of life”. But such defiant voices are looking increasingly lonely as the corporate exodus continues.

For now, we continue to monitor events carefully and look for green shoots of promising news that an end to the conflict can be found.

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