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B. G., Opalesque Geneva: Energy transition - a wide term that conveys the adoption of solar panels, wind turbines, and the gradual closing of oil wells and coal pits - is a journey that is not without its bumps and blocks and bottlenecks.
Generating power from renewables is only a part of the energy transition journey. The introduction of electric transportation infrastructure and energy storage, together with technologies to improve energy efficiency, are also driving this movement.
The global disruptions in energy markets and the war in Ukraine have added impetus to the push for energy transition. Yet, according to the IMF, many challenges remain at the forefront: the uncertain pace of technological development and deployment; the return of energy security; the lack of consensus on how fast the transition should and can take place; the divide between advanced and developing countries on priorities in the transition; and the obstacles to expanding mining and building supply chains for the minerals needed for the net-zero objective.
The energy transition will require trillions of dollars in spending, creating a major opportunity for investors, even with the existing roadblocks.
One of these investors is London-based Westbeck Capital Management, which manages three hedge funds that focus on sectors including energy, electric vehicles and batteries.
Macro risks
Currently, the firm is neutral in terms of risk exposure."We continue to be excited about the energy transition but see macro risks in the near term," Matt Fernley, head of research at Westbeck, tells Opalesque.
"Our favourite theme remains the shortage of critical raw materials. There has been a substantial disconnect over the past five years between the funds available for renewables, electric vehicles (EVs), energy storage systems (ESSs), cell manufacturing, and the raw materials needed to develop those products. And that is now coming to the fore, with prices for lithium and other battery materials, and likely strength in steel and base metals prices once the current macro weakness has receded. This under-investment in raw materials is likely to have impacts further down the supply chain and pressurise margins in the end markets."
Indeed, supply bottlenecks for key battery materials could be a barrier to such things as EV penetration. In McKinsey's energy transition scenarios drawn in December, the least-aggressive scenario (Fading Momentum) shows that EV growth could be capped by nickel supply in particular and, in the more aggressive scenarios, the risk extends across all four of the key 'active materials' needed for batteries (lithium, nickel, cobalt, and copper).
There has been considerable variation across the energy transition with regard to the supply chain, with companies in renewables, EVs, auto parts, ESS all struggling with shortages, Fernley explains.
"We are seeing supply chain issues alleviating, which should bring costs of transport as well as some components down, which is a positive, but we still see shortages in the supply of some key raw materials."
Westbeck Volta Fund
Matt Fernley is Head of Research for the Volta Fund, an equity long/short hedge fund investing in equities all along the battery value chain from raw materials, battery intermediates, battery manufacturing and into end markets. He is also the managing director of Battery Materials Review. He will participate in the Energy Transition panel at the Derivatives Forum Frankfurt 2023 on March 23rd.
The fund benefits from a concentrated portfolio consisting of long-term core investments and trading positions. Its investment universe is the entire energy transition value chain, a growing market with a value of $6tln and more than 400 stocks. Launched in July 2019, the fund has Cayman and UCITS structures. It was reportedly up 11% in 2022.
The MSCI World Climate Action Index, which represents the performance of companies leading their peers in terms of their positioning and actions relative to a climate transition, is down 8% YTD, after losing 21% in 2022 - compared to the MSCI World's returns of -7% YTD and -18% in 2022.
Westbeck sees energy transition as the largest investment theme of the next 20 years. The most important sub-themes are deglobalisation; material intensity; under-investments in raw materials; infrastructure investments; energy security; and the importance of batteries.
Westbeck Capital Management was founded in 2016 by Will Smith (formerly of CQS, Panmure Gordon and UBS) and Jean-Louis Le Mee (formerly of Abydos Capital Management, BlueGold Capital Management and Goldman Sachs). The firm is authorised and regulated by the FCA in the UK and licenced as an AIFM under European Union legislation. It manages $640m across three hedge funds, including the Westbeck Energy Opportunity Fund, launched in June 2016, and the Westbeck Resource Investment Fund, launched in November 2019.
Upcoming Conference
Matthias Knab will moderate the Energy Transition panel at the Derivatives Forum Frankfurt 2023 with veteran investors Jie Hayes of Songbird Capital, Nataliya Shybanova from AQUIS Capital, and Matt Fernley from Westbeck Capital Management LLP. This is one of the few panels of the conference which will be streamed online.
When: Thursday, March 23rd at 2:45 pm CET
Information and registration: https://agendatickets.derivativesforum.eurex.com/
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