James Holman
March 8, 2023
If
the auto companies hit their EV targets, we may be in the early innings of a
spike in demand for many commodities.
The
last twelve months have strengthened our view that metals could be a
significant bottleneck in the clean-energy transition. The war in Ukraine
further solidified the resolve of the West to find alternative sources of
energy and reliable sources of raw materials. Strained relations between the
US and China have made it a bipartisan issue to find friendly supplies of
minerals critical to our economy. As most of the major car manufacturers have committed
to electrifying their fleets, it appears there is no turning back on the global
auto industry going electric.
Below
is a compilation of news from recent months which we believe illustrates the
scale of the industrial rewiring the clean-energy transition will entail. These
also highlight the importance of securing sources for the necessary minerals. Please
note that the articles listed below are the opinions of the authors and are provided
for information purposes and do not necessarily reflect my opinions nor the
opinions of Merk Investments; emphasis may have been added in quoted text.
Industry News
- “If the world said tomorrow there
is no capital available for mining, decarbonization is impossible. It
simply can’t happen. There is a growing recognition of the criticality of
mining to the world’s decarbonization effort. Over a two, three,
four-decade time horizon, the choices we are making about potash, nickel
and copper…are sensible choices for us to make…As a long-term company
thinking in multiple decades, where do we want to put our focus? We want
to focus on those commodities that stand to benefit from those big trends.” -- Mike Henry, CEO of
BHP, interview with the Financial Times on November 30, 2022.
Kwasi Ampofo, head of metals and mining at BloombergNEF:
“The energy transition has put a spotlight on raw materials. It presents an
opportunity and a responsibility as well. Responsible mining must underpin the
extraction of the resources needed to meet this demand. Mining is the
bedrock of the energy transition, hence, the industry must lead the way, by
first decarbonizing its own footprint.”
The chart below, taken from the BloombergNEF article,
demonstrates the global economy is in the early innings of the energy
transition. The authors suggests that there will be ample and cheap sources of
raw materials. Measurements are as of the end of 2022:

A twitter
thread I wrote on this subject:

From the article linked to in my tweet:
“…global shortages of the metal may reach eight million tonnes by 2032, as soaring
demand continues to offset new projects numbers.”
Taken from the article, a table as to copper’s role in energy technologies:

This is an extensive report put out by S&P
with Daniel Yergin as one of the contributing authors. Mr. Yergin is likely
best-known for writing “The Prize,” which may be the most famous history book on the petroleum
industry:
“Copper -- the "metal of
electrification" -- is essential to the energy transition. But could a
looming mismatch between available copper supply and future copper demand
present challenges to the achievement of Net Zero Emissions by 2050 goals?”
- “An
additional 4.5 billion tonnes of copper would need to be mined; that is six
times more copper than has been mined in the history of our planet.”
Jessee Freeston of Decouple Media says in this informative YouTube video on how
much mining Freeston believes would be required to power the world with wind
and solar: https://youtu.be/19-gqgugKOc

“Replacing the
existing fossil fuel powered system, using renewable energy technologies, for
the entire human population is even more enormous task than thought, reveals the report
made by Associate Research Professor Simon Michaux from Geological Survey of
Finland GTK. Required extra energy and materials may form a bottleneck even if
we could reduce consumption and material needs via circular economy and
regulation.”

“New energy systems—SLB is focusing on
creating and scaling the new energy systems of tomorrow. With its New Energy
business evolving to a strategic driver for the company, SLB will continue
forging partnerships across various industries to develop technologies across
five areas: carbon solutions, hydrogen, geothermal and geoenergy, energy
storage and critical minerals.”
- The New Energy Outlook
2022 by Bloomberg NEF states: “Metals are a critical enabler, and a potential
bottleneck, for the transition. As demand for low carbon power, batteries and
grid infrastructure grows, so does the need for the metals that underpin them. The
scale of growth for some metals is enormous – 2050 lithium demand from the
energy transition alone looks to be about 17.5 times more than demand in 2020.
Energy transition-related demand for cobalt, nickel and copper in our Net Zero
Scenario also exceeds total demand in 2020 for these metals. This exponential
growth will require newer technologies that increase the scale of production,
without compromising the sustainable extraction of these metals.”

- It appears that Lithium is the first
commodity where the demand has radically increased because of the energy
transition. In recent years, in our analysis, the price has gone higher as
supply has not been able to respond to rapidly increasing demand.

Policy
News
The
European Union has put its stamp of approval on a reworked law yesterday
banning all new sales of internal combustion engine (ICE) vehicles from 2035.
“NTPC aims to add 20GW to 30GW nuclear capacity by
2040”
“Company will examine deploying small-scale, modular
reactors”
[The government of Canada]“recognizes that to
meet our ambitious climate and economic objectives to transition to a net-zero
economy, additional mechanisms must be in place to expedite and facilitate
strategic critical mineral projects from investment and funding opportunities,
through regulatory approvals and development, to production."
“It appears the Biden administration is
looking at funding roughly a dozen mineral projects overseas in a bid for
more resources used in lower-carbon technologies.”
“The law overhauled subsidies for
electric vehicles, creating a series of new requirements for vehicles to
qualify for the full $7,500 tax credit. One of those new” rules is that 40%
of the value of the minerals in a vehicle's battery must come from the U.S. or a
country with a free-trade agreement with the U.S. That percentage rises over time,
hitting 80% after 2026.
"I think that the situation of the last
year with the supply of fossil fuels just showed us how dangerous and
expensive the dependency on one supplier is." Mr. Seféovic said.
“MSP partners –
including Australia, Canada, Finland, France, Germany, Japan, the Republic of
Korea, Sweden, the United Kingdom, the United States, and the European
Commission – are committed to building robust, responsible critical mineral
supply chains to support economic prosperity and climate objectives.”
Deglobalization
News
“The father of Taiwan's chip industry said geopolitics have
drastically changed the situation facing semiconductor makers and warned that "globalization
and free trade are almost dead," and unlikely to come back.”
“As the U.S. turns to Canada for
‘critical minerals,’ Europe might come to rely on the historic mining hub of
Sweden.”
Please
reach out with any questions you have. Follow me at twitter.com/jamieholman.
James Holman
Portfolio Manager, Merk Investments