4 market leaders for the energy transition

Over the past three years, investment in the global energy transition has rapidly accelerated. In fact, according to research from BloombergNEF, investments increased by 27% in 2021 to total US$755 billion, up from US$595 billion in 2020 and US$264 billion a decade earlier. 

This investment, alongside the need for profound changes to political policy and changing societal behaviours, are needed if the planet has any hope of reaching net zero by 2050. 

Currently, the renewable energy and electric vehicle sectors have attracted the lion's share of investor funds, while electrified heat, nuclear energy and sustainable materials are rapidly gaining momentum. 

But which companies are going to lead the pack on the path to net-zero?

While we don't have a functional crystal ball at our disposal, Firetrail's Anthony Doyle and his team have done some of the hard yards for us, outlining four compelling companies with a sustainable edge and enviable market positions.

This includes a winning biofuel company, a Chilean copper conglomerate, and a surprising sector (and company) with impressive upside in the booming commodities cycle. Plus, Doyle also reveals the one company he believes will be a future leader in the race to net zero. 

Note: This interview took place on Wednesday, April 13th 2022. You can watch the video or read an edited transcript below.

Edited Transcript 

Will the world reach net zero by 2050? What happens if we don’t? 

Anthony Doyle: Will the world reach net zero by 2050? No idea is my answer. It's such a long time off in terms of where we stand today. But what we do know, what we can accurately forecast, is that there's a huge amount of momentum towards achieving that goal. 

So when we talk to companies from the bottom-up level, we want to understand what are they going to do in the next five years to try and meet those ambitions, that governments, that citizens are looking for in this climate change crisis. 

I don't have to talk to Sydneysiders about how unusual the weather has been, or parts of New South Wales that have experienced 1 in 10,000-year weather events in a couple of weeks, or talk to people impacted by the bushfires. So it's very clear that that ambition is important: net-zero by 2050. 

But we want to understand which companies are going to be current and future leaders on a positive change journey to assist the world in meeting those ambitions.

Isn't it amazing that Russia was involved in the oil price going negative during 2020, and now obviously on the other side, Russia is having an impact on oil prices in particular shifting much higher? Not only oil prices but commodity prices in general; the wider commodity complex.

It also reflects not only strong demand but supply being restrained. So, when the world entered into lockdowns across the world, you saw many producers start to scale back on supply. We're feeling the impact of that now. 

Now when you have high prices, inevitably what you find in a market economy, particularly for agricultural or hard commodities, is that supply will respond. The price will act as a signal for farmers to produce more or for oil companies to potentially extract more.

Now, at the Firetrail S3 Global Opportunities Fund, we're focused on companies with a sustainable edge. We don't invest in the old fossil fuel producers. But you can also get exposure to some of these thematics through companies that are helping the world transition to cleaner energy sources. 

For example, biofuel producers. So one company that we own in the portfolio is a company called Darling Ingredients (NYSE: DAR). So Darling Ingredients use cooking oil and they have relationships across North America with 140,000 restaurants. They dominate the used cooking oil market, so they have the ability to extract 40% of used cooking oil from these restaurants and they turn it into biodiesel, which is a chemical replacement for traditional diesel. 

So, across North America, you've found that these barrels of oil are so valuable that they're starting to be stolen. So you can go on YouTube and you'll see news reports from local news reporters highlighting that restaurants are having their old oil stolen because it is a very valuable resource in biodiesel. 

So Darling Ingredients, for example, is one way that you can invest within that thematic of rising energy prices, but you can invest in a company that is enacting positive change rather than a company that is extracting old fossil fuels.

How long do you predict this commodities boom will last?

Well, it's really difficult to forecast how long commodity cycles persist. I'm sure if you talk to the Australian Treasury, for example, their forecasts for the iron ore price are almost always wrong. And particularly who could forecast a global pandemic, who could forecast an invasion of Ukraine by Russia? But that's the main impact on the market at the moment, particularly in commodities, is this conflict that is ongoing in Ukraine. 

Now there are a number of plausible scenarios that could occur there and we have no edge in forecasting what might happen. Whether the conflict continues, whether it escalates or whether there is some form of truth entirely, and each scenario will have a different impact on commodities in particular. 

If you maintain the status quo, well then it looks like supply disruptions will be maintained, particularly for oil, energy and gas, as Russia is a major producer in that sphere. But high commodity prices will actually accelerate the transition for governments to more renewable sources of energy for their economies and try and extract themselves from the old reliances that they've had on oil and gas manufacturers and exports.

So with that in mind, you're actually seeing a significant tailwind behind renewable sources of energy, whether that be wind, whether that be solar. 

So it's a really interesting dynamic that's ongoing at the moment. And really Europe will probably lead the charge on that shift from fossil fuels to more renewable sources of energy.

So one of the commodities that we think could potentially have much more room to run is copper, given how vital copper is in the decarbonisation of the globe. Copper can be found in wind farms, EVs and solar. 

So again, if you looking at which companies could potentially benefit from a higher copper price, Antofagasta (LON: ANTO), a Chilean copper miner and a company that has invested heavily in desalination plants. It wants to be renewable, it has long mine lives and great relationships with the locals. 

This is a company that can benefit from high commodity prices whilst being a very important component of that shift to a more renewable world. So that is one way that you can think about how can I get exposure to a commodity via a company that has very, very strong demand fundamentals and supply hasn't responded as of yet.

Soybeans

So, another commodity that could potentially have further room in terms of price appreciation is an agricultural commodity, soybeans. So soybeans have benefited from the run up in wheat prices, as farmers have shifted their feed for their livestock and their herds from the high cost of wheat into soy meal, for example. 

So if you want to think about the devastation that the swine flu had on the livestock, particularly of pigs and hogs in China, the Chinese are rebuilding their swine stocks and soy meal is a significant component of that.

We own a company that is exposed to soybeans in particular. So it's called Archer-Daniels-Midland Co (NYSE: ADM) based in the US. What ADM does really well, is crush soybeans to produce oil for biodiesel. It's another important component of a renewable source of diesel, which has also appreciated significant. So ADM is benefiting from the run-up in soybean prices. It crushes the soybeans to make oil and the soybeans that are then extracted can also be sold as a meal for livestock and for agricultural uses.

We think there is a company that will greatly assist in the energy transition, a company based in France called Air Liquide (EPA: AI). It's the second-largest producer of industrial gases globally. Industrial gases have many usages from healthcare in terms of oxygen to also the production of semiconductors. 

Now, the opportunity for Air Liquide is that their top 30 clients emit a huge amount of carbon dioxide into the environment and much like the rest of the world, they want to become carbon neutral. They want to reduce that, but it's very, very difficult to do. What Air Liquide is doing is investing heavily in carbon capture technologies to assist their clients, those big clients to hopefully reduce their carbon footprint. 

They're investing very, very heavily in those carbon capture, carbon storage type solutions, and it could represent a significant market opportunity for them, many times, we estimate eight times larger, than the industrial gas market. Looking at where the price of carbon is today at 80 euros for example, in Europe, it could represent an €800 billion opportunity for Air Liquide.

Introducing a high conviction portfolio with a sustainable edge

The Firetrail S3 Global Opportunities Fund is a concentrated portfolio (approximately 30 companies) of Firetrail’s best global equity ideas. The investment process employs fundamental analysis to identify the most attractive investment opportunities with sustainable characteristics. Click here to find out more.