Norway Knowhow

Have a plan. Implement it. Give it time

The UK election is now only a few days away. Thank goodness I hear you all say. This campaign certainly feels like it has been dragging on, but we are nearly there. The only person who will be disappointed the campaign is over is the Lib Dems leader Ed Davey, who appears to be having the time of his life.

Other than a grown man bungee jumping or paddleboarding, which I have a lot of time for, it is frustrating that so much of the media coverage is about the short term promises or the miniscule differences between parties. Which tax will slightly increase? Which tax will slightly decrease? How many hospitals will be built? How do you define a new hospital? It might be good for a soundbite but does very little to address the bigger challenges the country faces. So, I don’t want to talk any of that. Or the mind numbing debates, or the meaningless three word slogans. I want to celebrate the unsung heroes, the boring technocrats, the long term planners, the quiet visionaries.

17.5 Trillion Krone

The current value of the Norwegian sovereign wealth fund is 1.6 trillion US Dollars. That’s TRILLION.  With 12 zeros. This is obviously a huge amount of money, but even more exceptional when you consider the size of Norway’s population. They could wind up the fund tomorrow and give each of their 5.5 million citizens about $290,000 each.

A sovereign wealth fund is a state-owned investment fund made up of wealth generated by the government. A well-managed sovereign wealth fund  can play a vital role in a country’s economy and can generate investment growth to help fund the government’s spending needs.

The Norwegian Government Pension fund is diversified across equities, bonds, property and infrastructure. The equity allocation alone is spread across 9,000 companies, and equates to, on average, 1.5 percent of all listed companies in the world.

This is now the biggest sovereign wealth fund in the world, and a phenomenal success story. But it very nearly wasn’t.

Tredje Gang Heldig (Third Time Lucky)

Norway is a relatively small country north of Denmark, bordering Sweden on one side and the ocean on the other. As such, their traditional export industries were fishing and heavy industries such as steel manufacturing, mainly due to their access to cheap hydroelectric energy. Then in 1969, oil was found off the coast of Norway. And it was a whopper of an oil field. The Ekofisk site is still one of the biggest producing oil fields in the North Sea.

The oil revenues started flowing in to the Norwegian government in the 1970s but it was not until the 1990’s the sovereign wealth fund was established, and in 1996 the fund received its first transfer of $200m from the Ministry of Finance.

The two questions you may ask yourself is a) why did Norway set up a sovereign wealth fund and b) why did it take them so long?

The answer to these questions is largely because of volatile commodity cycles.

Crude Oil Price 1969-2024. Source: Macrotrends July 24

The first oil peak in early 70’s brought Norway unexpected revenues, which drove up wages and created high inflation. This in turn lead to Norway borrowing more and more money and they nearly found themselves seeking a handout from the IMF. Luckily for them, oil peaked again in 1979, when the revolution in Iran saw oil prices quadruple from $10 to $40 a barrel. This spike in oil revenues reignited optimism in Norway and the  spending taps were once again turned on. Cue high consumption growth, high credit growth, and high inflation. When oil prices fell in 1986, the economy virtually collapsed and Norway experienced a banking crisis because people didn’t have the money to repay their loans, house prices fell and unemployment increased.

In the middle of this crisis, a plan was conceived. After squandering their first two ‘windfalls’ and seeing the economy rise and fall at the whim of oil prices, Ministry of Finance officials realised they needed to dampen the volatility. The needed to fix the roof when the sun was shining. They needed a long term plan. If oil prices began to once again soar, and they got a third chance, Norway would reinvest these proceeds into a government investment fund, manage it properly and give it time to grow.

At the end of the 90’s they got their chance.

Mismatch Of The Day

Oil prices rising and falling in cycles is a common feature of the global economy. This is true across virtually all commodities, from agricultural commodities, to precious metals or industrial metals.  Sometimes these cycles can last for several years, but ‘supercycles’ can span decades. This typically occurs when commodity demand sees sustained growth but supply can’t keep up,  which in turn leads to prices increasing significantly. Higher commodity prices incentivise  producers to invest in exploration and mining, which eventually increases supply and brings prices back down. These cycles are ultimately based on a mismatch between supply and demand.

There is reason to believe we are now a start of a new supercyle in energy transition metals such as aluminium, copper, nickel, silver and others. If you want to reduce the use of fossil fuels then you need to be replace it with something else. Nuclear, hydrogen and other forms of power will play a part, but simply put, to decarbonise the world’s energy mix you have to electrify. Huge volumes of various metals required for clean energy production, energy storage and electric vehicles (EVs) are driving metal demand, but production deficits in many of these metals are expected by the end of the decade, or in some cases sooner.

From the demand side of the equation, there is a growing need to need to speed up the green transition. Despite global renewables generation quadrupling over the last decade, the emissions from fossil fuels still hit a record high last year. This is because energy demand is growing faster than renewables output.

The growing use of Artificial Intelligence (AI) has also increased electricity consumption, and as the semiconductor market expands, this will continue. Additionally, the construction boom driven by onshoring production, revamping the electric grid and new data centre developments, will all add to the long-term demand for these commodities.

Lastly, in a world of ever more volatile geopolitics many countries are looking to ramp up their defence spending , and many of the same commodities are required to build more fighter jets or missiles.

So, how do things look on the supply side of the equation? Still pretty bullish for commodity prices. Capital expenditure in the mining sector has halved over last 10 years, because investors preferred investing in ‘sexier’ growth areas of the market such as technology. This means that the global average time to build a mine has increased to nearly 16 years. Given the high costs involved in the exploration of new mines, the cost of digging the metals out of the ground and existing reserves gradually depleting, it would not be a surprise to see a much higher level of M&A activity. Once commodity prices start to rise, there will be a lot of interest in any company which has high-quality exploration and development stage assets.

Today, the semiconductor industry is nearly six times larger than the entire mining industry. Given the requirement of certain metals, it is difficult to see how this imbalance can continue over the next decade.

The dynamic of higher demand and limited supply has created an attractive investment opportunity, and we have added exposure to our portfolios though investments in both the underlying metals and the global mining sector.

Boom Time

When a new commodity cycle emerges it can be an exciting time. In the mid 1990’s I worked for an oil company in London. Oil prices were about $16 a barrel, and my older colleagues talked about the heady days of the 1980’s when oil was $40 a barrel and the company was making so much money they used to just go to the pub at Friday lunchtime and not come back to the office.

If we are indeed at the start of a new cycle there are fundamental investment lessons we can learn from Norway’s forward thinking technocrats.

Have a plan. Implement it. Give it time.

Also, it helps if you can discover oil!



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