The Future is Green — ChAI

The macro backdrop for base metals remains supportive, as strong demand from China — which has just announced a net zero emission target (peak emissions by 2030, net zero by 2060) — and further US fiscal stimulus (with a focus on “green” infrastructure), together with the EU’s plans and others, has brought the green agenda to the fore. Many of the factors that had helped drive copper up from its March lows of around $4,300/t and other base metals like nickel are still intact in spite of the US election.

These included strong demand from China, where the government’s pledge to be carbon neutral was starting to drive policy decisions. China’s Net Zero (by 2060) recent carbon emissions commitment could be a game changer for the metals and mining industries. As the world’s biggest importer of copper and other metals/minerals, its demand sets many of the terms of trade for the mining industry.

Last week’s meeting of the China Communist Party also highlighted the positive medium-term outlook for metals demand which will play an important role in China’s green revolution. Plans to focus on sustainable growth, including the expansion of renewable energy are likely to boost demand for metals, such as copper and nickel. Infrastructure investment in rail and roads are likely to be reduced in absolute terms but the accelerated upgrading of urban areas should still support strong metals consumption, especially with local infrastructure such as metro lines.

Under the new five-year plan starting in 2021, China is aiming to have new energy vehicles account for about 20% of total car sales by 2025. This is supported by strong demand in the short term. China’s average daily vehicles sales gained 10% y-on-y to 57,274 units in October, according to the PCA. The two metals are key ingredients to the development of the electric vehicle (EV) sector.

Put simply, the energy transition starts and ends with metals. If you want to generate, transmit or store low/no-carbon energy you need metals. Most metals will be needed for the energy transition. The biggest growth sector will be EVs — a 2 oC or lower pathway will see demand soar from 5mn vehicles today to at least 80mn by 2030 (source: Wood Mackenzie). The EV body will heavily rely on aluminium to minimize weight, and copper for wiring. The batteries for EVs and the emerging energy storage market will drive up demand for lithium, nickel, and cobalt. Copper and aluminium are critical to the expansion of transmission and distribution grids, as are solar panels. Copper and aluminium demand are forecast to increase by about a third by 2040, nickel by two-thirds, and cobalt and lithium by 200% and 600%, respectively, according to consultants Wood Mackenzie.

Tin often the forgotten critical metal had a role to play in what we can term the Fourth Industrial Revolution — the coming whirlwind of machine-to-machine communication, the internet of things and artificial intelligence or AI. An MIT study concluded that tin would have the most to gain (relative to market size) from new technology and the four megatrends of EVs, renewable energy, advanced robotics and advanced computation and IT.

The China of early this century offers the only comparable explosion in demand for metals and mining in living memory. Metals demand rocketed as China began its prolonged investment in national infrastructure. Then as now, China is leading the way, adopting the green revolution as other countries play catch up hindered by the fact that these are not centrally planned/command economies.

More than $1tn of investment will be needed in key energy transition metals over the next 15 years just to meet the growing demand of decarbonization if global warming is to be kept to less than two degrees by 2050, according to Wood Mackenzie. This is almost double the figure invested over the previous 15 years. Metals prices are below long-term incentive price levels and therefore need to rise to see increasing investment in new supply to meet increasing demand, but the problem is that bringing on new mines typically takes 5–10 years before production reaches the market and that’s not taking into consideration more stringent ESG issues.

About the Contributor: Robin Bhar has worked as a metals analyst for over 30 years in several corporate and investment banks in London, most recently at Societe Generale where he was Head of Metals Research from 2012–2019. Prior to that, Robin was a Metals Strategist for Crédit Agricole, providing research and strategy for the bank’s clients and internal trading and sales teams. Prior to CA, Robin worked at UBS and Standard Bank London working with the metals & mining advisory, trading and sales teams. He also has experience at Brandeis Brokers and at Rudolf Wolff & Co. where he began his career. Robin holds an Honours degree in geology and a Master’s in mineral exploration.

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Originally published at https://chaipredict.com on November 10, 2020.

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