Commodity Watch: Cleaner Flames Changing Supply Chains

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI</strong><br><br>PRESIDENT OF GEMCORP CAPITAL ADVISORS LLC, PORTFOLIO MANAGER<br><br>Ahmad Al-Sati is Portfolio Manager of the Gemcorp Commodities Alternative Products strategy (GCAP) and President of Gemcorp Capital Advisors LLC, based in New York. He is responsible for leading Gemcorp’s commodities-focused investment strategy and overseeing the firm’s US advisory platform.</div></span></div><hr><p style="margin-left: 0" data-pasted="true">An 1,840-mile pipeline from Texas to New York began delivering natural gas to NYC in 1951 “from the region of the world’s greatest natural gas reserves to the world’s richest market”. Transco replaced the coal burned to produce toxic low-heat gas with a high energy odourless energy source enhancing lives across the city and helping eliminate the blue haze across the city.</p><p style="margin-left: 0">Efforts to substitute traditional fuels (dung, wood and kerosene) with more effective and less harmful fuels have been progressing all over. One highly effective replacement of traditional fuels is liquified petroleum gas (LPG): a mixture of petroleum products that are used in homes to cook, heat and generate electricity. LPG is energy efficient, easily transportable and low carbon. It is now used daily by over 3 billion people, with 1.3 billion people using it as their primary source of energy.</p><p style="margin-left: 0">LPG’s pervasiveness provides an illustrative example about how the physical world continues to permeate everyday life in important ways, how disruptions can cause knock-on effects globally and how ultimately very little can be done to improve sustainability without investing appropriately in the physical production and transport of essential commodities that run our planet.</p><p style="margin-left: 0">Recent LPG shortages caused price increases globally. The IEA estimates that consumers in Africa spend an additional 10% of their income to buy. In India, which imports 60% of its LPG (90% of that comes from the Gulf), long lines and rationing are negatively impacting industries as different as restaurants (reduced food), ceramics (shutdowns) and information technology (electricity) as consumers and businesses are unable to meet energy needs.</p><p style="margin-left: 0">The effects go beyond India. Indian LPG shortages added to gasoline prices in California, which imports key ingredients (alkylates) from Indian refineries- India instructed its refineries to prioritize LPG over alkylates, which then caused global shortages. LPG importers are also realizing the importance of redundant supply chains. For example, India is starting to import LPG from the US (3rd largest producer), which increases lead time and costs across the chain (just in case is eclipsing just in time). At the same time, consumers are seeking other types of appliances. For example, demand for induction stoves is up 10x. However, these devices require reliable electricity that most LPG consumers lack today. Using new appliances or feedstock thus requires investing in building more generations and transmission across these markets, which is capital and time intensive.</p><p style="margin-left: 0">Energy markets are not abstract. They have real world effects. In the developed economies financial (gamified?) markets, the futures curve of the largest commodities grabs the headline, but a subset of commodities will ultimately have real world effects on prices, inflation, industrial output and trade patterns globally- few will be immune.</p>