Transcript of The Value Perspective Podcast episode – with Bob Brackett

Hi, everyone and welcome back to ‘The TVP Pod’. We have another entry in our occasional ESG miniseries for you this week as Juan and Andrew Lyddon sit down with Bob Brackett, a managing director and senior research analyst for AllianceBernstein, who is based in New York and covers the North American oil and gas sector. He started his career working for Exxon Mobil and, before joining equity research, worked for McKinsey. In 2018, he also wrote a short novella of sorts, entitled How Tech will End the Oil Age – ‘a tale of whales, wheels, sales, fails, faeces, fortunes, madness, crashes, travails, retreats, charge and charging’. It is a fascinating story that explores the history and disruption of commodity and extractive industries. Bob, Juan and Andrew cover off what has changed since he published his book in 2018; historical analogies between the fur trade, tobacco and the oil and gas industries; the past, present and future of coal; and lesser-known materials that are key to human survival. Enjoy!

08/02/2023
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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value
Andrew Lyddon
Fund Manager, Equity Value

Chapter headings for Bob Brackett on The Value Perspective Podcast

Please click on the link below to jump straight to a chapter

* Bob Brackett, welcome ...

* The diffusion of innovations

* Oil and coal; fur and whaling

* How green can an oil major be?

* The ‘EV’ in ‘evolution’

* The case for a World Copper Day

JTR: Bob Brackett, welcome to The Value Perspective podcast. It is a pleasure to have you here. How are you?

BB: I am very well. Thank you so much for having me.

JTR: Bob, for those of our listeners who do not know you, please could you offer a brief introduction?

BB: I am currently a sell-side analyst covering oil and gas and global metals and mining at Bernstein Research. It is a job I have done longer than any other in my career – it has been 12 years now. Prior to that I was an executive in the oil business; a management consultant before that; and a technical oil and gas practitioner before that. And I picked up an MBA and a PhD in Planetary Sciences along the way – so a bit of geology and hopefully a bit on the finance side as well.

JTR: Before we move onto our planned topics for this episode in The Value Perspective’s podcast ESG miniseries, I wanted to ask if you have any updates on the OSIRIS REx asteroid probe mission?

BB: Interesting! That was a throwaway comment in one of the long notes I have written – but we are still waiting. Here’s a bit of a palaeontology joke – a kid goes into a museum and sees this big dinosaur there. He asks the attendant standing next to it, How old is that dinosaur? And the attendant replies, It’s 65,000,007 years old. The kid is like, Wow, that’s pretty precise. How do you know that? And the attendant replies, Well, I started working here seven years ago – and when I asked how old that dinosaur was, I was told it was 65 million years at the time.

So that’s my only palaeontology joke – but the punchline harkens back to OSIRIS Rex. We spend a lot of time as investors trying to process these very long wavelengths or long time period and ideas and theme – and then we are also forced to sit there and think about the weeks and the quarters and the years. Often that is the challenge – and we can fool ourselves by trying to line them up too precisely. But one of the reasons I do finance and I am where I am now is I do like that short attention span – you can create a hypothesis and then you can go and test it to see whether you were right or wrong. Those feedback loops are very fast.

Now, OSIRIS REx is a mission where a probe has launched and has collected a sample from a comet and it is now returning to Earth. These orbital distances take years and years – and you don’t know until the thing actually lands and is recovered intact whether the experiment has worked or not. So it really shows, when you’re thinking about science – and when we talk about natural resources – that the timeframes are just extremely long, compared to our day-jobs of refreshing every few minutes on the screen.

JTR: I had never heard of OSIRIS REx before reading the book you published in 2018. Could you please tell us a bit more about that project?

BB: My job description is to get attention so that I can talk to institutional investors – and to do that ethically and reliably. Beyond that, however, there are very few rules. I could write a quarterly update on a large-cap stock or I could write a long-term forecast – but, in the oil and gas sector, it was getting more and more difficult to attract attention.

And so, seeking attention, I tried a ‘half-book’ – effectively, a half-size version of what Bernstein Research is very famous for: their classic ‘Blackbook’. What I did was I looked at the oil and gas industry – which, even back in 2018, was seen as going away – and I tried to debate this mythical tech investor, this disruptive investor. I argue from a bunch of analogies in the natural resource world, Well, wait a minute, I’m not dead yet, and maybe these things take longer than the latest version of the smartphone and so on.

So that was the genesis of that book – it was really an effort to get attention and it worked to some degree. A year after, I ended up picking up metals and mining as a way to get attention because, again, the remarkable thing about the oil and gas industry is how important it is – and how long, I think, it’s going to be around – in contrast to just how little investor interest there has been up until we came out of the pandemic, frankly.

JTR: That is a great segue into our next question. Given you published your book in 2018, examining all these different materials and trying to find analogies to see if you can – in essence – disrupt the process of extracting materials, how much have things changed over the last five years?

BB: I mean, in many ways, so much has changed – and yet so very little has changed. We are consuming, as a planet, more oil and gas than we were back then. EVs [electric vehicles] are being adopted and grinding up through their ‘S’ curves. The technology for EVs has not been displaced but the number of consumer choices has broadened. In many ways, you might even ask – why do we even need electric vehicles, when gasoline vehicles are perfectly good for the purpose? And the reason is, we are trying to undertake an energy transition to reduce CO2 emissions and ultimately minimise their impact on the global climate.

And that journey has barely budged – in fact, we haven’t made very much progress on it. And in between all of that we had this perfect experiment – we actually had a year in which global emissions fell. And, if you looked at that in a vacuum, you’d say, well, that year 2020 – that was great. The planet really got together and decided to reduce global emissions. How did they do that? The answer was, well, they had a global pandemic and they stayed home for a year. We’re past that, we’re also past that emissions ‘notch’ and we’re back very much to the trends that have been going on for the last five years.

The diffusion of innovations

JTR: You have highlighted how different analysts were reading the Tesla situation – pointing out those covering the technology side of the research could be very bullish on the business while those covering oil and gas or any other sector could be quite bearish. We need to be careful about talking about valuation levels or signal to our listeners on this podcast but, with that caveat, how much has the Tesla story changed the landscape over the last five years – because it did pick up quite a lot of momentum?

JTR: Sure. I’ll first mention a fantastic book, called Diffusion of Innovations. It’s quite an old book – it was first published in 1962 – by Everett Rogers.. He founded a lot of the ideas we have around ‘early adopters’ and ‘fast followers’ – all of those kinds of classic tech paradigms and analogies – and he started out by studying social adoption. So some of the work he did involved going to Peru back in the 1960s and 1970s and trying to convince local businesses to stop going down to the river to collect water and instead boil it at home. You would think you could spend all this time explaining the science about boiling off parasites and so on but none of that really worked. You really needed ‘change agents’ – people in the community who were respected and thoughtful and could say, Look, I boil water, so you should too.

So if you think about where we are in the ‘diffusion of innovations’ for EVs, the early adopters have them now, the fast followers have them and we’ve moved from selling 100,000 EVs a year to north of a million a year and we’ll hit the 10 million a year mark in the coming years. So they are fairly ubiquitous at this point – in fact, in the early days of the Tesla you would see one go down the street and you’d look at it, right? We’re now in a world where Teslas are our limousines and taxis and whatnot and they don’t attract that attention. So we are moving into the middle of that adoption curve.

JTR: That’s really interesting. There is a great passage in your book: “Look to rubber. Look to hydropower. Look to coal and the pace of its death. Look to diesel and gasoline competing. Look to the whaling industry. Look to guano. Energy and raw materials are extractive industries and different from cameras, smartphones, cheap design and social trends. And the more investors can accept that, the more willing they might be to consider that, although in the long run the oil sector will be dead and in the short run the oil sector is hated, it is always the muddy middle where the money is to be made.” Could you elaborate on why extractive industries should not be compared to tech-type disruption?

BB: There are two problems with the tech-type disruption analogy. One is survivorship bias – and you see this all the time. Somebody will name 12 amazing technologies and highlight they are the 13th, which leads to this assumption of perfect 100% market share penetration. You know, probably the metaverse is the classic example of that right now – this idea that we are all going to enter the metaverse.

But then you go back and and look and, whether it is Xerox or fax machines or pagers – or even higher-visibility products like the Segway back in 1999, say, or Google Glass 10 years ago – there were all these technologies that can take extremely high market share. And they can move extremely quickly – because I can set up manufacturing and factories and produce these things and bring them to market quickly. And they might, for a brief period of time, hit near-perfect adoption – and then they get displaced by the next technology that has a half-life of construction-to-market of a couple of years.

I mean, the other example is digital cameras, which destroyed the analogue camera market. We all kind of know that – but what we don’t realise is that smartphones came and destroyed digital cameras. There was a period of time where everyone was going to own a digital camera – and suddenly Apple or whoever puts them on their devices. There is a famous quote that ‘the best camera is the camera you have in your hands’ – and now everyone leaves that big, bulky DLSR at home and travels with a smartphone camera.

So that’s technology – very rapid, very competitive, driven by consumer preferences and with winners and losers. While, on the extractive industry side, it’s just a lot of work. It is time cycles that are measured in decades. It is finding the resource and appraising the resource and moving toward a final investment decision and then developing that resource and then producing it out. Again, those time periods and those return periods are measured in decades.

Plus, they are less dependent on consumer preferences. Consumers don’t even know how they are using most of the elements on the periodic table – it is just woven into their life! And so it is just a very different pace of industry. It comes with extremely high capital investment and it comes with extremely low decline rates – so, once it’s flowing or growing or once it’s being produced, it just kind of stays with us.

JTR: You repeatedly make a very interesting point in your book – demand for any material has never declined. It always goes up and up.

BB: Yes – it is dominantly correct. I’ll say it two ways – we talk about oil demand but no-one actually demands oil, right? No-one looks around and says, I wish I had a barrel in my backyard. What people really demand are the things oil allows. So we refine a barrel of oil and, of course,  we get plastics and gasoline and jet fuel and diesel. Those are the things that allow me to have my devices and to move around – so mobility – and they give me the ability to purchase goods from far away. So demand for those things never goes away.

Population grows every year. GDP per capita grows – on average – every year and that all translates into demand for the things that natural resources provide. So, unless human behaviour changes, the demand for things in the physical world keeps rising. The US Geological Survey has these great datasets that go back 100 years – how much peat moss does the world use? How much copper and aluminium and iron ore and steel and so on? Those things just continue to rise. It is the exceptions where they fall – and in those that fall are the interesting lessons to be learned.

AL: You suggested the medium-term is the most interesting timeframe. So – particularly for oil and gas – what is your view on where that medium term is? If in the long run, those commodities die off, what’s your view on where demand peaks in the medium term and then the time period over which it tails off?

BB: Today, coming out of the pandemic, demand is back to about 100 million barrels of oil per day. We think it rises towards 110 and then plateaus and rolls over – so we think there’s another 10% growth to come on the demand side. All of that demand growth is coming from non-OECD countries. So the future of oil demand growth is the non-OECD – think China, India, the Middle East, Africa and so on. You get the idea. It is basically those countries that have not yet achieved the same lifestyle as us, which is kind of fuelled by oil.

That is 10 years out. When you look at some of the valuations in our sector, you’ve got companies ... and not even valuation – let’s just talk about dividend yields. There are dividend yields for companies that drill and produce shale oil that are at 8%, 9%, 10% – for companies with places to drill, healthy balance sheets and so on. So that ‘muddy middle’ for a shale company is basically the market saying, Pay me 10% a year and I’ll take a chance on whatever is left in 10 years. But that’s the timeframe that’s being measured – it ain’t 20, 30, 40, 50 years. It’s not a tech stock where I go out 40 years on my DCF and discount it back to today! It’s measured between now and, hopefully, our retirement dates.

Oil and coal; fur and whaling

JTR: In your book, you are always trying to find historical cases from the past that can help us think about how things might play out for the oil and gas industry in the future. One was the fur industry – so do you really think, as of the start of 2023, that oil and gas is on borrowed time?

BB: The fur industry is interesting because fur has a perfect substitute, right? You can go into almost any clothes shop in the world and find synthetic fur, that is more colourful and cuter than the real thing. Plus it doesn’t have the negative externality – at least from the standpoint of the mink. And yet, the natural fur market continues – it has just moved into the non-OECD countries. Again, it is kind of a recurring theme – as incomes rise and people there try to achieve a lifestyle that perhaps the West achieved a generation ago.

So, yes, the fur industry continues and so calling its end would be tough. Calling the end of the oil industry? We’ll see. But the view is, if you can build a model that’s quantitative that can get you to 2030 and can justify valuations, then you can kind of look beyond and say, Well, I’ve been paid for taking that risk in a mature industry – and I’ll just continue to keep taking it. Risk/reward for mature industries has to benefit the person taking that risk.

AL: To come back to that middle ground and timing, I didn’t ask you about coal. That is a resource that has been used for an incredibly long time and has refused to go away even though lots of people would like it to. Now it has become so controversial – thermal coal, in particular – what are your thoughts on how long it will be, in the view of some people, a ‘necessary evil’ for the world?

BB: The target of net zero for thermal coal is about 2040. Today, the planet consumes about seven billion tonnes of thermal coal a year – so each of us about a tonne – and we have to get from where we are now to zero in 20 years. That requires double-digit decline rates – say, 10% or 15% – to be meaningful. The typical coalmine is a 30 to 40-year asset. One divided by 30 years is about 3% a year so, if you’re a coalminer, you are thinking, There is this threat that demand is going to fall much faster than my base asset declines – and certainly, if the market is screaming today for me to add capacity, I’ve just got to say, Well, that doesn’t make any sense ... do the DCF. So what will you do? You will manage your thermal coal asset into any demand environment and, as demand falls – if it falls – you’ll shut the highest-cost mines and the price-setting mechanism will move to lower and lower-cost mines until we’re done.

So that would be the default assumption – that net zero wins in a time period of 20 years and thermal coal is stranded. But the reality is, it has been basically flat for several years – in the wake of the invasion of Ukraine by Russia, you have seen Europe pull every cargo of LNG it can to feed its natural gas demand. That LNG was competed away from Asia, which then looked and said, I need electricity – what do I do? I burn thermal coal for electricity. And so the volatility in the short run – because we have underinvested in thermal coal and because we have written it off – will create these periods of overearning on the back of its senescence.

AL: I guess thermal coal is not a particularly acute issue in those non-OECD countries you mentioned – with countries such as China, South Africa and Indonesia being highly dependent on it. Is there a way they can wean themselves off that in a timeframe that is useful? Or, again, is that just something that is only going to go one way and, in terms of the climate challenge, the West has to attempt to offset that?

BB: Yes. And again, it’s that emerging theme – most of the planet is not a middle-class or better, wealthy Westerner who has had the benefit of generations of overconsuming versus the average. So it is this theme of the emerging markets, the non-OECD, coming into wealth and wanting all of the things that requires, which is energy. Now, it comes back to this idea that there is no demand for thermal coal, right? There is only demand for electricity. Meanwhile the price tag to achieve net zero here in 20 years is in the hundreds of billions to trillions a year. So there is a price tag. The technology exists. The capital might exist. The will might exist. So it is solvable but it is not linear. And it is not just ‘down to the right’ – it is volatile.

JTR: One of my favourite lines of yours, which you have mentioned in other podcasts as well as in the book, is that, many centuries ago, an English king actually tried to ban coal because he didn’t like the pollution aspect – and not even that could stop people from consuming coal.

BB: Yeah. Coal has always had negative externalities – and back then it was the soot. And even a decade or two ago ... I used to work in China and, in the western part of China, the key challenge to coal consumption was not CO2 emissions – that was much too abstract for where they were in their development. There were two aspects – the prevalence of home-cooking with coal, with all the associated soot, alongside the lack of best-generation technology for scrubbing. So you constantly had soot in the atmosphere, which fell almost like pollen during tree season, if you live in the South. So coal has always had this negative externality – but anytime its utility exceeds that negative externality, and there’s no adult in the room, you end up in the same situation. So coal has outlasted everyone so far who has tried to ban it.

JTR: One point that really comes across in the book is how materials often stop being used not because of a lack of supply but because society decides the cost-benefit equation has changed and then regulation is imposed to remove that specific material. Fur is one example you mention but there is also whaling. People did not stop using whale products because there were no more whales left – they just decided it was not good to keep killing whales.

BB: Yes – and two people have been given credit for saving the whales. One is incorrect; the other is correct. The meme that runs around the oil industry is that John D Rockefeller saved the whales because he introduced kerosene into the market. The first use for oil-drilling, up in Pennsylvania, wasn’t for transport – it was for illumination. At the time, candles were extremely expensive and whaling – especially for sperm whales – was all about collecting a high-quality source of light. Then kerosene becomes available, the kerosene lamp comes in and suddenly that destroys the demand for sperm whales and the sperm whale industry ends.

That idea is somewhat correct but it is a little more complicated than that and, of course, the whaling industry did not end – in fact, it peaked in the 1960s and 1970s. Whaling was an important source of calories for World War Two Europe and then for post-World War Two Japan. So, ultimately, the person who saved the whales was Richard Nixon – not generally perceived as either an environmentalist or as much of a nice guy! But he was responsible for the Marine Mammal Protection Act, he was responsible for the Clean Air Act, and he was responsible for the Endangered Species Act – so a remarkable set of policies under his presidency.

What ultimately happened, though, was people looked at the cost of whaling and they worried about the health of the oceans and they worried about this term ‘charismatic megafauna’. For most of history, whales were regarded as monsters – the same as giant squids or sea dragons – and what the 1970s campaigners did was humanise whales and made humans love whales. And suddenly the utility of whaling – we didn’t really need those calories – against the benefit tilted and saved the whales.

And it has it worked similarly to save fur – at least in the West. Again, it is kind of that trade-off, how do you attach a ‘social love’ and let that drive that regulation? The world has tried it, for example, more recently with polar bears and climate change – it hasn’t quite stuck but it was very deliberate: how can I put a charismatic face against a crisis and therefore use that as the lever with which to push society to change?

How green can an oil major be?

AL: The oil majors are trying to do lots of different things at the moment and spending their capital in lots of different directions, whether it be shareholder returns or sustaining current hydrocarbon supply, while also having an eye on investor concerns about their long-term future. What, if anything, are the oil companies are investing in today – whether it is windfarms or hydrogen or whatever – where you think their historic skill set gives them a chance of succeeding? Or are they effectively throwing good money after bad in looking for an answer to the future?

BB: OK. I’ll divide that almost into two questions. First, should they reallocate their cashflows into these things? And second, will they succeed? On the ‘should they?’, the analogy, if we go back to history, is if I run a whaling fleet and I change my business model to say I am going to slowly do less whaling and some of my fleet I will use instead to do cruises for whale-watching – I don’t think that would resonate. Or if tobacco companies invested in healthcare, I think people would look at that and say, well, that’s a little odd.

So there is something here around messaging. And so, when oil and gas companies then invest in say, renewables, the question is, will they ever get fair credit for it? And even if internally they believe it’s the right thing to do, and it’s part of a portfolio, how will the valuation work? And we have seen a bit of a schism between how the European integrated energy companies think about it and how the US listed ones do.

In the US, the business model is, OK, here’s the cashflow to the investor – now you, as the investor, reallocate it to the sectors you think need it. Go fund a renewable start-up, go fund a wind start-up and so on. In Europe, it’s more of a mix – generating these cashflows and reinvesting within renewables in the portfolio. And certainly, within Bernstein, we have had this debate about how successful oil and gas companies can be here.

On one side, oil and gas companies are some of the largest allocators of capital in the world. If you look at the mega-projects that oil and gas companies do, they are the most expensive things we as a society undertake. I think the Three Gorges Dam is one of the largest capital projects undertaken but, behind that, come projects like Kashagan, the giant oilfields, in Kazakhstan; or Gorgon, the giant LNG project in Western Australia.

So the oil industry can deploy massive amounts – billions, tens of billions, up to hundreds of billions of capital – into projects across the planet. They have supply chains and the capability to build anything almost anywhere – and they have the project management capabilities to do that. They are full of smart scientists and engineers. So, from that perspective, you look and say, Right, those capabilities are there – but the difference is, once you start investing into renewables, they are more regulated markets. If you think about utilities and electricity, they tend to be lower-return because they are regulated – and they tend to have a different mindset.

So the oil and gas companies in the past have branched out in periods of high cashflow. Exxon, for example, used to own copper mines and coalmines and uranium mines – and typewriters – while Mobil, in the old days, used to own giant retailer Montgomery Ward. So they have tried to diversify in the past though never been hugely successful – perhaps, for cultural reasons. Now they are trying again – and I think the jury is still out. But, clearly, if your goal is getting to net zero, if your goal is abating some of these negative impacts, you want as much capital flowing into the sector as possible. As an investor, you might not want that but, as a policymaker – yes, let everybody throw their cash into the pile. The more we spend, the faster we get smart.

JTR: You referenced tobacco earlier, which reminds me of another passage in your book I found really interesting: “If an investor tells me my sector [oil] is going the way of internet stocks, I’ll be ecstatic – if confused. If an investor tells me my sector is going the way of coal, I will be worried. But if an investor tells me my sector is going the way of tobacco, I will take it – harmful, sticky, addictive and inelastic are almost synonymous – as is a product with a long history, slowly being driven out of favour by the legal system and society but seeing hope in emerging markets. Well, that is, at the very least, an interesting and potentially investable sector.” Can you explain why the tobacco industry analogy is potentially so powerful and why gasoline is ‘addictive’ – at least for the time being?

BB: Yes. Gasoline – at all parts of the barrel – is addictive. The perfect test was Covid, when demand for oil fell about 10%. We shut in the global economy and, despite that, 90% of the end-uses of oil continues. So that gives you a sense of just how woven it is into the global economy. Now, when I wrote that note in 2018, you could have pulled up on Bloomberg the top dividend-paying stocks in the S&P 500 and, at the top of that list, would have been tobacco stocks. In 2018, the companies I covered in oil and gas paid trivial dividends – if they hadn’t cut them in 2016 and if they weren’t getting ready to cut them again in 2020. Call it 1%, 2%, 3%.

Fast-forward to last year and you could have pulled up the top-paying dividend stocks in the S&P 500 – and they were oil and gas companies! Now arguably, there is a cyclicality to that versus the structural nature of tobacco dividends – but, effectively, the oil and gas sector said, OK, let’s go and be like tobacco. And by that, I mean, you have an industry that’s in secular decline – although not yet for oil and gas – and you have an industry that’s heavily taxed, but nonetheless has this extremely inelastic demand. In the US, when they tested taxes on cigarettes, I think they found that, by increasing the price 350%, they reduced demand just 33%. That is just a massive level of inelasticity.

And so the tobacco analogy is that it is regulated. It has a negative externality. It is a great source of taxes – so $300bn a year are raised in various tobacco taxes globally. That is a meaningful amount of the tax base and therefore policymakers don’t want to zero it out tomorrow, because they’ll have to replace that stream. But they want to zero it out slowly – and, in the meantime, the tobacco industry is very well structured, the companies behave well and they return cash to shareholders. So it is a fairly accurate analogy that is coming true as we speak – and that is even before we’ve seen the peak in oil demand.

The ‘EV’ in ‘evolution’

JTR: Turning to electric vehicles, you wrote in your book there needs to be a meaningful technological advantage between the electric vehicle and the combustion engine version for the latter to be replaced by the former. Five years after you wrote that, do you think EVs have actually closed the gap?

BB: The idea was, if you have two goods that are sort of substitutable, what drives the purchase decision? And so, in the case of analogue cameras versus digital cameras, clearly the digital camera was a vastly superior product for 99% of users – excluding the hobbyists who are very much into developing their own film or whatnot. And certainly smartphones versus dumb phones and flatscreen TVs versus CRTs – in each of those cases, the new product had significantly more utility than the old product. Plus the price points were comparable and the price outlay was small, for a consumer – I’ll spend 100 bucks and try this digital camera.

And then you come to electric vehicles and vehicles in general and, generally speaking, the purchase of a vehicle is the second biggest purchase a household makes apart from their house. So it is a very large-ticket item – and the question was, what’s the relative utility? And does that drive that adoption? Then you can start to segment it by early-adopters and the middle and so on and, at the time – and, frankly, still today – the earliest adopters of EVs typically owned at least two vehicles. So the EV was one of the two or three vehicles and, generally, an internal combustion engine was the second or third. So even among early-adopters, you were not hitting 100% penetration and so you could ask, Well, how are we ever going to get to 100%?

Fast-forward five years and the ultimate sticking points for EVs are what they always were – range anxiety and charging times – and both are being addressed. So, over time, the typical EV has modestly greater utility and a comparable price point – although this year, certainly as metal prices rise, we are seeing that diverge a bit. We don’t have the killer app – the EV bulls would say the dream is around full self-driving, right? That is a massive step-up in utility although, again, that is not unique to electric vehicles – unless an EV manufacturer dominates that technology and has an economic moat. So it is proceeding – there is a relative utility benefit for EVs and we are slowly climbing that ‘S’ curve. But it certainly hasn’t drastically changed.

AL: Given there is a much larger carbon footprint to an electric vehicle than consumers perhaps realise when they drive it, insofar as that footprint is one step removed from the actual driving of the vehicle and in the supply chain – the extraction of metals and so on – do you think that will ever be factored into people’s views on what they buy? Or is that again, just one of those inconvenient realities that sits in the background and stops things changing but makes people feel better about how they are living?

BB: It is interesting because, if you do look at the entire footprint of an EV versus an internal combustion engine and you burden that EV with the carbon footprint around extracting the metals that go into it – and there is a huge range of views on this – but a rough consensus is, if I can drive that EV for seven-plus years, then I will have a beneficial carbon footprint. But that sort of means, if I buy an EV and I wreck it in year five, I actually haven’t benefitted the environment.

And certainly over time, as we get better at recycling battery metals, that calculus will shift – and, if we ever become circular, it gets even better. So I think, in the short run, the answer is those climate benefits of EVs are overstated in that consumer’s mind. In the long run, it is required we get to a circular economy so that would be beneficial. So I think most adopters of EVs who do it – along with other lifestyle changes – I mean, they are doing it with a longer and perhaps more optimistic horizon.

AL: OK. Now, a previous guest on the podcast has made the point that rather than throwing all the tax subsidies and so on at EVs, the strategy should be to encourage more people to adopt hybrids and the cost/benefit ratio, in terms of reducing emissions, would be more favourable if things were done that way. Do you have any thoughts on that?

BB: Yes – I mean, golfcarts have been around forever and would solve almost all of our issues – if you could just convince people to use them or, frankly, just public transportation! We have technologically solved the various problems we have around how much CO2 we put into the atmosphere, we just haven’t socially solved them – we haven’t convinced people to give up their lifestyles for the greater good.

Coming back to the pandemic, that was a period of time where everyone had an opportunity to soul-search – there wasn’t much else to do! So you’re sitting at home, you could do whatever you want and you could contemplate how to be a better person. Yet, by and large, we did not necessarily become better people after the pandemic. So the social challenges are much more difficult than the technological ones. But, yes, certainly Toyota, for example, is a big believer in hybrids to solve the problem. There are solutions – it is just, how do you solve the social aspect?

JTR: One material that seems to be missing from your research, at least in the 2018 version, is uranium. Could you offer a few thoughts about the role of nuclear energy as a solution going forward?

BB: I’ll split that into fission and fusion. On the fission side, one of my favourite laws is Wright’s Law, of which Moore’s Law is a more specific version. So Moore’s Law we are familiar with in the context of semiconductors but Wright’s Law is just this concept we learned by doing – that every doubling of units produced reduces cost by a fixed percentage.

So the idea is, if you’re going to tackle a technology, pick one you can do lots and lots of times because you’ll take all the cost out of it. And certainly, in my career, shale gas and then shale oil was that technology. We did lots of little units of capital and we learned the whole time and we utterly deflated the cost curve. So, on the nuclear side, that is the answer. Just go to a default set-up, build the same reactors over and over again, take out the cost and you have solved for that problem – once you have overcome the social aspects, again.

On fusion, that’s a classic ‘just around the corner’ or ’10 years off’ idea – and it has been and always will be because of the capital involved. Just massive amounts of capital uncertainties – it is much more like a moon-shot project. Whereas on the fission side, you can have a ‘Liberty ships’ type project, which is ‘let’s build lots of them and get smart about it’. So uranium is interesting. It is going to be with us, in theory, longer than oil and gas will. It suffers from the same social aspects. But, you’re right – I haven’t tackled it quite yet.

JTR: Definitely something new for the third edition of the book!

BB: Yes!

The case for a World Copper Day

AL: There is obviously a lot of debate across all these topics but are there any materials or technologies that tend to be overlooked or people don’t realise their significance to how they want things to develop?

BB: Yes. I’ll throw out one example that’s out of the scope of things I focus on and then one that’s inside. The one that’s just remarkable in terms of how important it is to humanity and how little anyone thinks about it is the Haber-Bosch process for making ammonia. The idea is you can take natural gas and you can get cheap electricity and nitrogen from the atmosphere and that is where the vast majority of the Earth’s ammonia comes from. It is one of the three critical fertilisers – along with potash and phosphorus – and, without the Haber-Bosch process, the planet could support probably half the people it has.

So instead of the eight billion of us running around, we would be back to the 1970s level of population at four billion. Each of us uses about 15 kilogrammes a year of ammonia. We never see it, we never smell it and yet it is the reason half of us are well-fed and moving around. There is a whole industry around it and a whole system that moves it around the planet. It is a dominant form of natural gas demand – yet no-one ever pauses and celebrates, say, World Haber-Bosch Process Day or World Ammonia day.

The other one that is near and dear to my heart is just copper. It is very hard to pick winning technologies and so, as the energy transition plays out, we don’t know how the hydrogen economy will evolve, for example, or how much platinum that will consume. Or how solar panels will evolve and how much silver those will consume. Or even, on electric vehicles, how they will evolve and how much cobalt they will consume.

But behind all of that is the fact that, when you go to the periodic table of the elements, copper sits there as the natural connector of moving electricity around the planet from sources to uses. And, generally speaking, the average person consumes about three kilogrammes of copper a year – which is like 30 bucks – and it is literally the backbone of the future of electricity. And, again, there is no national holiday for copper that I’m aware of – although Chile should probably have one.

AL: I can’t remember what wedding anniversary copper is but I don’t think it is a particularly illustrious one, is it?

BB: Exactly!

AL: That is interesting because what I also wanted to ask is, in the same way some of the oil majors and other oil-related companies have tried to position themselves as more progressive on the energy transition, we are now starting to see some mining companies also talk about how their portfolios are positioned to supply and support the energy transition. First, is that actually a theme or is it just mining companies branding things for their own benefit? And, if it is a theme, what metals or other materials would you want in your portfolio of mining assets if you are running a mining company?

BB: I would contrast the miners with the oil companies. The oil companies, you have to feel a little sad for them, because they have an industry where their customer has to stand out in the cold and hold the gasoline pump down – and they can see exactly how much they’re spending as they pump, which is something measured in the 10s or 20s or 50s or 100 pounds. And they can just see that leaving their wallet as they stand there by the side of their car.

No other product that consumers purchase operates that way – when you go to the grocery store to buy milk or beer or wine or whatnot, they don’t make you pump it into your own jar or container, while you watch the price tick up. No other product sits at the corner every time you drive by and tells you the price of it. In many ways, the oil industry and the consumer interact in this very negative way – and so nobody really loves an oil company.

On the mining company side, no-one ever thinks about, say, which mine their copper came from or what company produced it. So they are very much less visible to the public eye – until something goes terribly wrong – and therefore they sort of operate in a world where they don’t have to worry about that day-to-day consumer. That gives them a bit of freedom to do what they think is right, I suppose. So the challenge they have isn’t facing the consumer – they never do. Their challenge is facing the local community.

And so I think, if you’re a large global diversified miner, you say, Hey, I can help in the energy transition – I can mine copper and certainly nickel and cobalt and lithium ... and you go down the list. The challenge is that mining interacts with that local environment – so, for example, the typical grade of iron ore today is 0.5%. That means I have to move 100 tonnes of rock; blast it out of the ground – it’s an open pit, let’s say – reduce it to the size of flour, which takes energy; extract that 0.5%; and then I’m left with 99.5% of my 100 tonnes that I have to dispose of in a way that is safe for the environment, but clearly takes up large volumes.

So local ESG has become more and more powerful over time – local communities have a louder voice than they have ever had – and that is a force for good. The drawback is, it creates this huge tension between global ESG – solving the world’s energy transition challenges – and local ESG, where that local community is told, Well, I really need to develop this large asset in your backyard. That will have impacts – whether it is the trucks coming up and down the streets, whether it is the risks of the tailing piles being handled safely and so on. And so I think for the big miners, that is where their thoughts are – how do you balance that local and global ESG? And, currently, local ESG is winning, which makes sense because local problems are always more important than global; near-term problems are always more important than long-term. That is the world we’re in and it’s reflected in the prices of commodities that we see today on our Bloomberg screens.

JTR: Bob Brackett, thank you very much for coming onto The Value Perspective podcast. This was absolutely fascinating.

BB: My pleasure, Juan. And thank you, Andrew, as well.

AL: Yes – thanks very much, Bob.

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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value
Andrew Lyddon
Fund Manager, Equity Value

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The Value Perspective
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