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  1. 1. Energy Newsletter February 2011Global Fund Exchange is a global SPOTLIGHT ON: OPPORTUNITY IN AGRICULTUREasset management businesswhich invests across all areas of Does more volatility mean more investment opportunitythe New Energy Revolution. in global agriculture? by Lauralouise Duffy For many years, we have been studying and actively investing in globalIn this issue: agriculture, which as of late has been extremely volatile. The question on many• Opportunities in Agriculture investors’ minds is will this increased volatility translate into attractive• Global Water Scarcity investment opportunity?• Saudi Arabian Renewable Energy The Agriculture Commodity Markets Research Outlook 2011 from Rabobank• European Off-shore Wind highlights seven key themes influencing global agricultural commodities in 2011. We feel this information is important for all investors in this space:• ‘Big Oil’ Capex Spending• New Rare Earth Mining Initiatives 1. Tightening inventory levels for many agricultural products, with stocks-to-use levels similar to what was seen during the 2007-2008 food crisis period.Our investment focus : 2. Supply limitations may result as 2011 production increases are used to build• Clean Energy up reduced stock levels that were depleted over the past year.• Water 3. Emerging markets have recovered faster than the developed world from the• Agriculture global economic crisis, and demand for agricultural products has risen in turn.• Traditional Energy 4. Chinese demand for commodities is now a driving force in the global• Natural Resources agricultural sector. Demand is particularly high for soybeans, sugar, cotton and• Carbon & Emissions corn. “China has played a key role in transforming the global soybean markets,”• Systematic Trading explains Rabobank’s Luke Chandler. “China now accounts for 60 per cent of global soybean imports, in addition to approximately 20 per cent of world traded• Hedge Strategies soybean.Learn more: 5. Heightened political risk amid tightening food supplies are a top priority for governments around the world. This has resulted in increased government• Downloads Section participation in the agricultural markets.• Request call with Portfolio Manager 6. Fundamentals are only part of the story, analysts say, with the influence of external macro factors becoming more and more important. The projected increase in energy prices over the coming year will also affect commodity prices. 7. Sustained heightened volatility is likely here to stay, the report concludes. We are constantly scrutinizing market news and data to uncover trends and opportunities in this important investment sector.+1 212 570 7970 GLOBAL FUND EXCHANGE LTD.globalfundexchange.com Investing in the Future of Energy
  2. 2. AGRICULTURE NEWS Supply/Demand Disruptions Cause FoodBrazilian Agricultural “Revolution” Can Prices to SoarProvide a Model for the World World food prices rose to a record in January on higher dairy, sugar and cereal costs and are likely to remain elevated, the United Nations said in a recent report. An index of 55 food commodities climbed 3.4% from December to January 2011, the seventh straight increase according to the UN’s Food and Agriculture Organization (FAO). Farming in the cerrado region of Brazil Among the five foodAs the world grapples with the challenge of how to feed an categories, dairyestimated 9 billion people by 2050, many point to Brazil as prices led advancesan example of a nation that has experienced a near with a rise of 6.2%.miraculous transformation of its agricultural sector.Brazil has shifted from a net importer of food to a powerful Food commoditiesforce comparable to the “big five” food exporters (U.S., extended gains last Source: UN FAOCanada, Australia, Argentina and the E.U.). It is also the month after jumpingworld’s first tropical agricultural giant. in 2010 as drought and floods damaged crops from Russia toBetween 1996 and 2006, the total value of the Brazil’s Argentina.crops rose 365% from 23 billion reais (US$ 13.7 billion) to “The new figures clearly show that the upward pressure on108 billion reais (US$ 64.5 billion.) Overtaking Australia as world food prices is not abating,” Abdolreza Abbassian, seniorthe world’s largest exporter of beef, Brazil’s exports have economist at the FAO, said in a statement. “These high pricesincreased tenfold in a decade. It is also the largest exporter are likely to persist in the months to come.”of poultry, sugar cane and ethanol, and now accounts forone-third of world soybean exports. Remarkably, Brazil’s Corn prices – and with them, the price of meat – are set tosoybeans are farmed on a mere 6% of the country’s total explode if the latest import estimates from China are correct.arable land. China, the world’s second-largest corn consumer, probably willGovernment subsidies have not played a major role in this quintuple imports of the grain in the next five years as demandagricultural transformation. In fact, federal agricultural increases for livestock feed, according to the U.S. Grainssupport in Brazil is comparatively less than other major Council. Last year, Beijing recorded its largest imports of cornagricultural exporters. According to OECD data, state since its disastrous crop of 1995-96. But this year could seesupport accounted for 5.7% of total farm income in Brazil further record purchases. The US Grain Council reportedduring 2005-07, comparing with 12% in the U.S., 26% for recently that it estimates Chinese imports as high as 9MM tonsthe OECD average and 29% in the E.U. in 2011-2012, up from only 1.3MM tons in 2010-2011.What then is Brazil’s secret? Heavy investment in With the cost of corn critical for the entire supply chain, highagricultural science research and technology development. corn prices lead to higher prices for poultry, pork, lamb andEmpresa Brasileira de Pesquisa Agropecuária, or the beef, emerging countries that are already suffering from highBrazilian Agricultural Research Corporation, was set up by inflation could be facing a more intense shock of agflation thanthe state in the 1970s and since then has become the previously thought.global leader in tropical agricultural research. The company Sugar cane plantations in Australia, the third-largest exporter,has made advances in optimizing the soil composition of suffered severe damage after Tropical Cyclone Yasi cut throughthe cerrado region, improving grass varieties and modifying an area accounting for a third of output, helping send futuressoybeans for tropical growing environments. prices to a 30-year high.The end result of this research has been an agriculturalexplosion in the cerrado region, which supplies 70% ofBrazilian exports and has been called “the new Midwest.” 2
  3. 3. WATER NEWS – GLOBAL WATER SCARCITYIn the Middle East: In the American Southwest:Water scarcity in the Gulf region is a serious and growing Researchers at Scripps Institution of Oceanography at UC Sanproblem, according to the United Arab Emirates National Diego have warned that Lake Mead, a key water resource inEmergency and Crisis Management Authority. the region, could be dry by 2021 as a result of growing waterAs demand increases, said Director General Mohammed demand and the unpredictable effects of climate change.Khalfan al-Rumaithi, the UAE may need to make harsh choices Should water levels in Lake Mead or Lake Powell fall, thebetween using water for direct human consumption vs. Southwest will be entirely reliant on the Colorado River, aagricultural irrigation. potentially dangerous dependency, considering the recent“Wars can erupt because of water,” he warned. “Using periods of sustained drought in the region.groundwater for agriculture is risky. If it doesn’t harm us, itwill harm other generations.” Southern California’s Imperial Valley, which produces about 80% of winter vegetables in the United States, is also facingThe UAE is one of the highest per capita water consumers inthe world. Abu Dhabi on average uses 550 liters of water per water threats. Farmers in the Imperial Valley irrigate theirperson per day, compared with the global average of 180-200 farms from water diverted from the Colorado River. However,liters. water from the Colorado is under heavy demand from rising urban and suburban centers throughout the area, from the bright lights of Las Vegas to sprawling communities in Arizona. Water levels in the Colorado River have been declining for years, yet water demand is ever-increasing, leading to what we believe is an unsustainable situation going forward. In China: To address lingering drought in the grain-producing regions in the North, the Chinese government has announced over $1 billion in spending measures to divert water, build emergency wells and construct new irrigation infrastructure. Official data shows nearly 2.57 million people and 2.79 million livestock have suffered from shortages of drinking water as a result of the droughts, which are the worst in over 60 years. The UN’s Food and Agriculture Organization (FAO) has issuedSource: International Water Management Institute warnings on the potentially devastating impact on the winter wheat crop. “The ongoing drought is potentially a very seriousFreshwater reserves in the UAE are expected to dwindle problem,” the agency warned. These grave water concernswithin the next five decades, leaving the Emirate dependent have prompted China to invest a further $608 billion in wateron groundwater extraction and desalination. conservation projects. According to a central policy document known as the No 1 document, China will proceed with effortsThe UAE, along with many neighboring Middle Eastern to promote conservation and sustainable use of water.nations, is investing in farmland on other continents such asAfrica, both as a means to secure future food supplies as well Over the next decade, China will invest 4 trillion yuan (US$ 608as reduce domestic water usage. billion) into water projects, says Chen Xiwen, director of the office for the Communist Party of China (CPC) Central“We suffer from a shortage of water and we should think Committee’s Leading Group on Rural Work.about solutions to preserve it rather than using it foragriculture,” Mr. Rumaithi told the Federal National Council China aims to double its average annual spending on waterduring a discussion of food and water security. conservation over the next 10 years. It will assist the water sector in securing loans and raising private investment forLast October, Abu Dhabi laid the groundwork for the world’s water conservation efforts.largest underground reservoir, which would hold 26 millioncubic feet of desalinated water, enough to meet rationed “Floods and drought in recent years have exposed weaknessesdemand for 90 days in the case of an emergency. in water conservancy infrastructures,” the document said. Last year, Southwest and Northern China experienced severe droughts, and other regions across the nation dealt with major flooding and mud-rock flows. 3
  4. 4. RENEWABLE ENERGY NEWS Emerging Economies to Drive Primary Energy Growth : BP Energy OutlookSaudi Arabia Looks to Renewable Energy Although new energy regulatory policies and the deployment of clean technologies may help slow global carbon emissions, BP nevertheless predicts total emissions in 2030 will be 27% higher than today in its Energy Outlook 2030 statistical report. BP also predicts over the next two decades emerging economies will drive a 40% growth in primary energy use. A whopping 93% of new energy growth will come from emerging economies as Chinese oil consumption grows by 8 million barrels a day (mbpd). By 2030, Chinese consumption will likely reach 17.5mbpd, bringing it ahead of the United States as the world’s largest consumer of oil. BP suggests the global energy mix will change as the world adds production capacity in order to meet new demand. Although fossil fuels contributed 83% to consumption growth between 1990-2010, BP expects this contribution to fall to 64% between 2010-2030. In addition, oil’s share of total fossil fuel usage is expected to decline gradually as use of naturalSite of The King Abdullah City for Nuclear and Renewable Energy gas increases. Despite the recent spike in coal use as a result of voracious demand from China and India, BP expects this growth trend will reverse somewhat by 2030.Despite possessing vast oil reserves, Saudi Arabia is At the same time, BP predicts the use of renewable energy,discovering that increasing domestic energy demand has had nuclear power and hydropower will increase over the next 20an effect on its oil exports. The nation has embarked on a years. Taken together, non-fossil fuel energy will for the firststrategic plan to explore the use of renewable and nuclear time make the largest contribution to all new energy usage,energy to meet growing demand. from 5% today to potentially 18% by 2030.“We have started to take the required steps to utilize severalenergy sources locally, in particular solar and nuclear Offshore Wind Power Booming in Europeenergy,” said Saudi Oil Minister Ali al-Naimi. Europe is currently the world’s fastest moving market in“The demand for electricity is steadily increasing — it was 40 offshore wind technology, says the European Wind Energygigawatts in 2010, and is expected to reach 120 gigawatts in Association (EWEA), a Brussels-based agency with over 602032,” remarked Hashem Yamani, the director of the King member countries. According to its year end data, 2010Abdullah City for Atomic and Renewable Energy, to marked a 51% increase in European offshore wind installationsjournalists at a recent conference in Riyadh. In total, €2.6 billion was invested in 308 new offshore turbines,Simultaneously, he added, “local demand for oil, which is representing 883MW of new power capacity.currently about 3.2 million barrels per day, could rise to eight As part of the EWEA, the United Kingdom leads the globalmillion barrels per day by 2028.” market in offshore wind. In Europe, the UK is followed byAn increase of this magnitude may limit Saudi Arabia’s Denmark, the Netherlands, Belgium, Sweden and Germany.capabilities to export to the rest of the world and would be Possessing 25% of the region’s offshore wind resources,an obstacle for future development. Scotland could grow to become Europe’s largest offshore wind“That is why we are determined to transform a country center. Gamesa is reportedly setting up its offshore winddependent solely on oil to different sources of energy — headquarters in Scotland, confirming the area’s growingnuclear and renewables,” Mr.Yamani said. attractiveness to the industry.Over the next decade, the Kingdom will spend $80 billion to With potentially 1,000 to 1,500MW of newly installed capacityincrease its power generation capacity and its energy coming online in 2011, Europe will need new gridtransmission network. infrastructure. Ten countries on the Northern coast have joined forces to develop a high-voltage DC current “supergrid” to link offshore wind farms to the central grid, but the project is currently in early stages of planning. In contrast the United States, which is still in administrative struggles to develop its first offshore wind farm off the Massachusetts coast, Europe is at the forefront of this growing industry. 4
  5. 5. TRADITIONAL ENERGY NEWS Leaked Cables Highlight Fears of Saudi “Peak Oil”Big Oil Capex Spending Could Top 2008RecordsLooking to increase production and take advantage of highoil prices, analysts expect significant new capital investmentsfrom the ‘Big Oil’ companies in 2011.Spending from the world’s top publicly traded oil companies;ExxonMobil, Chevron, ConocoPhillips, Royal Dutch Shell, BPand Total; may reach record levels in 2011, says ING oil andgas analyst Jason Kenney, potentially reaching $128.54bn, a$10bn+ increase from 2010 spending levels. This amountcould top the record $127bn spent by Big Oil in 2008.Offshore drilling exploration will be a high priority as oilmajors seek to broaden their resources and plan for thefuture. “In 2014, about 63% of the majors’ new sourceproduction is forecast to come from the offshore – shallowwater and deepwater,” notes Rebecca Fitz of consulting Oil pipeline Source: Adam Leegroup PFC Energy.However, the consequences of the BP oil spill are being felt Confidential cables published by WikiLeaks suggest that thethroughout the industry. Ramifications from the spill will U.S. is worried about declining production capabilities andprompt companies to pay more attention to safety and the stated oil reserves of Saudi Arabia, the world’s largestregulatory compliance procedures during offshore producer of oil.exploration and production. Associated costs, especially in The cables were written between 2007-2009, including theNorth America, are predicted to rise as a result. time of global oil price peaks in 2008. One exchange warned that Saudi Aramco, the state oilOil Breaks $100 on Middle East Fears production company, no longer possessed the ability to influence global prices by raising oil output.Political turmoil in the Middle East has pushed oil prices over “A series of major project delays and accidents over the last$101 a barrel, its highest level in over two years and an couple of years is evidence that Saudi Aramco is having toimportant psychological marker for the market. The run harder to stay in place – to replace the decline in existingimmediate worry for many investors is whether revolts in production,” one of the cables read.Egypt and Tunisia will intensify instability among the moresignificant oil exporters, such as Saudi Arabia. Another cable warned Saudi Aramco may have overstated its recoverable reserves by as much as 40%, or approximatelyAlthough analysts clearly see a fear factor in the market, the 300 billion barrels.International Energy Agency (IEA) has attempted to alleviatefears of another oil price spike. The IEA has highlighted Dr. Saded al-Husseini, a former exploration engineer andcertain fundamental differences between today’s situation board member of Aramco, said based on current productionand the situation in July 2008, when oil reached an all-time rates, Saudi Arabia would likely reach the “peak oil” inflectionhigh of $146 a barrel. point – where new production cannot sufficiently make up declining older fields – in around 17 years. By that time,For one, global oil stocks are also nearing 10 year highs and peak oil for the world as a whole will have already come andwould be sufficient to cover approximately 61 days of gone.forward oil demand. Current spare tanker capacity is alsosufficient enough to deal with any potential disruptions to The content of these classified cables is in contradiction tosupply routes. other recent statements from Saudi Aramco executives, many of which have boasted that levels of oil production inNevertheless, we have witnessed the volatile political Saudi Arabia can be maintained for a century, as opposed tosituation in the Middle East translate into volatility in the the 17 years suggested by Dr. al-Husseini.marketplace, and expect this will continue as the conflictspersist. As a result, we are keeping a close eye on allpolitical developments in the region, especially those relatedto oil production, refinement and transportation. 5
  6. 6. NATURAL RESOURCES NEWS New Mining & Technology Plans to Counter China’s Dominance of Rare Earths The world’s growing appetite for clean energy technology, advanced batteries, electric vehicles and various high-tech devices has prompted an increase in demand for rare earth materials. China dominates this market with over 90% of all global supplies, with the United States, Japan and South Korea almost entirely dependent. China has indicated it will reduce exports of these crucial elements, sparking a panic amongst clean tech and battery manufacturers worldwide. Rare earth elements on the periodic tableCompanies around the world are seeking new rare earth mining regions, and Mongolia has been drawing significant attention.By some estimates, Mongolian deposits of rare earths may rival that of China. A recent joint venture between Green TechnologySolutions and Rare Earth Exporters of Mongolia has been struck to transport Mongolian supplies over land to the Russian seaportof Vladivostok, thereby by-passing Chinese ports entirely.Governments in the United States, Canada and Australia have begun to look into mining their own rare earth reserves for fear ofa shortage once China restricts its exports. The United States government views rare earth supplies as an important factor inenergy security, and the Department of Energy recently released a Critical Materials Strategy examining ways to secure suppliesfor future demand.The Obama administration has also “fast-tracked” permitting to reopen Molycorp’s rare earth mine near Mountain Pass,California to boost U.S. domestic supplies. It is clear that securing supply chains of these important elements is essential forfuture development of the clean energy industry in the United States, and around the world. SOURCES We regularly gather information from the following reputable sources, including but not limited to: Bloomberg New Energy Finance RenewableEnergyWorld.com Financial Times EnergyandCapital.com Forbes.com: Energy News The Wall Street Journal Green. – The New York Times Streetwise Reports: The Energy Report New Energy World Network Thomson Reuters Scientific American REChargeNews.com SustainableBusiness.com Climate Change Business JournalWEB LINKS: U.S. Energy Information Administration (EIA) Commodity Futures Trading Commission• Homepage• Login/Register CONTACT US• Downloads Corporate Head Office 222 Townsend Square Tel: +1 212 570 7970 Oyster Bay, New York 11771• Contact us Toll Free: 1 866 608 5559 United States of America• Request call with portfolio Please visit our “Future of Energy” blog for more news updates. manager GLOBAL FUND EXCHANGE LTD. 6