India's success in renewables can emerge as a global case study
Over the past two months, our ESG Edge has focused on decarbonization and its huge investment potential, globally and in India. In the third part of the series, we drill down to the impact, decarbonization will have on global metals and mining demand. In our view, the impact will be transformational.
The move towards decarbonization will be highly mineral intensive
The move towards a low carbon future will be highly mineral intensive and could well emerge as a critical pillar of the next elongated metals and mining upmove. Up until now, global metals and mining cycles have been driven by industrialization and urbanization. Decarbonization is set to emerge as the third vital driver of commodities demand as the world embraces the net zero targets. The most recent supercycle in commodities seen in the past decade was largely anchored by China’s voracious infrastructure and housing boom. The upcoming elongated cycle will be anchored by large fiscal spends on infrastructure in the United States and many other countries together with a conscious move by a climate aware world to build green infrastructure, necessitated by a global urgency on embracing decarbonization. While China will be a significant factor, given its scale, the real driver will be the energy transition - as the world accelerates onto a two-degree pathway. It will be a global theme rather than a specific country or region that delivers transformational demand for commodities. In China too, green investments will provide a new area to boost demand as traditional infrastructure and property construction reach well penetrated levels.
Decarbonization will impact metals and mining demand from specific areas such as the move towards clean energy (wind turbines and solar panels and battery storage) and electric vehicles. We had spoken about the massive scale of opportunity in these areas in our previous writeups under this series. Certain metals and minerals which are vital to decarbonization will see demand of the kind the world has not witnessed before, threatening the already constrained supply in some of these. Also, commodities such as oil and coal which have been generic to commodity upcycles in the past, are not only going to be absent from the upcoming elongated cycle but they face structural headwinds. This could hasten their demand destruction and prices could correct as the world decarbonizes.
Which metals and minerals will see strong demand from the energy transition What will be the scale of demand?
The big five energy transition (decarbonization) metals are copper, aluminium, nickel, cobalt and lithium, apart from rare earth and Indium. The scale of demand can be gauged from estimates from Wood Mackenzie and the World Bank. Wood Mackenzie forecasts1 copper and aluminium demand to increase by about a third by 2040. A recent World Bank Group report2 notes that the production of minerals, such as graphite, lithium and cobalt, could increase by nearly 500% by 2050, to meet the growing demand for clean energy technologies. It estimates that over 3 billion tons of minerals and metals will be needed to deploy wind, solar and geothermal power, as well as for energy storage, in order to achieve a below 2 degree Celcius future.
Clean energy is far more material intensive than fossil fuel-based counterparts. For instance, an electric car uses five times as many minerals as a conventional car and an onshore wind plant requires eight times as many minerals as a gas-fired plant of the same capacity, according to the International Energy Association.
Moreover, the body of the electric vehicle will heavily rely on aluminium to minimise weight, and more importantly, copper for wiring. Copper is essential for the increasing use of electricity throughout energy systems thanks to its unmatched ability to conduct electric currents. Consequently, it will be a vital link in almost everything as the world moves towards the 'electrification of everything'.
Lithium, cobalt, and nickel will find very high demand in batteries due to their superior charging performance and higher energy density. Some rare-earth elements such as neodymium will be vital for wind turbines and electric vehicles.
Will the world be able to meet the colossal demand for the five transition metals without unleashing commodity inflation?
How will the world feed the massive unforeseen demand for the five transition metals? Will this demand and potentially constrained supply lead to huge price spikes in some of these commodities? These are very real issues which investor and regulators will need to keep in mind, over the next decade or so. We will answer these in the next report under our decarbonization thesis.
Sources
IEA, Minerals used in selected transport technologies, IEA, Paris
IEA, Minerals used in selected power generation technologies, IEA, Paris
1 Wood Mackenzie Oct’20, The Energy Transition Will Be Built With Metals
2The World Bank May’20, Mineral Production to Soar as Demand for Clean Energy Increases
Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP