Over the past three months ESG Edge has focused on decarbonization and its massive investment potential, globally and in India. Last month, we had highlighted how a transition to a net zero economy will catalyse a commodity super cycle. In a continuation of the series, in this issue of ESG edge, we highlight our conclusions on why we believe that the super cycle - at least for some metals - will see prices spiking very sharply. Yes, this commodity super cycle will be long and "greenflationary1 and beset with geopolitical supply risks.
Will Copper, Graphite and Cobalt become the new oil?
The key energy transition metals, which will see a massive spike in demand over the next two to three decades are copper, aluminium, nickel, cobalt, lithium, rare earths, and graphite. Fast paced growth in demand for these metals will - at least until supply normalizes by mid-decade (2024-25) - put enormous strain on the global supply chain, which will result in higher prices for longer time periods. The production of these minerals is geographically concentrated, in fact, far more than that of oil or natural gas. For lithium, cobalt and various rare earths, the top three producers control well over three-quarters of the global output. In some cases, a single country is responsible for around half of the worldwide production. For example, Congo, produces 60%2 of the world’s cobalt. All of this means that the supply of these highly vital commodities will be impacted by regulatory changes, trade restrictions or even political instability in a few countries.
The metal that is seen to be facing the biggest supply shortfalls over the next five years is copper. Copper is an essential material for the increasing the use of electricity throughout energy systems, thanks to its unmatched ability to conduct electric currents. Consequently, it will form a vital link in almost everything as the world moves towards the 'electrification of everything'. While there is a global consensus on the spectacular demand for copper, Goldman Sachs is most optimistic. According to them, "By 2030, copper demand from the energy transition will grow nearly 600 per cent to 5.4 Mt in our base case and 900 per cent to 8.7 Mt in the case of hyper adoption of green technologies." If we look at the top 10 copper mines in the world today, the average discovery was made in 1970. And with the demand shock of de-carbonization, there will be a wide supply-demand deficit for the rest of this decade. According to BHP, "The mines are getting deeper, and the grades are declining. If you need to induce supply, you can do it in high-risk jurisdictions with greenfield projects or good jurisdictions with brownfield projects. Both will not come cheap. That is an absolute issue to look at." The copper market as it currently stands is not prepared for this demand environment and GS project copper prices are to rise to USD 15,000 in 2025 from USD 9,300 currently - an increase of 60%.
Graphite and Cobalt
Graphite, which has so far been largely used by the steel industry is finding a new growth dynamic. By virtue of being the second largest component of lithium-ion batteries by weight, it is indispensable to the global shift towards Electric Vehicles. Unfortunately, it cannot be substituted by lithium as graphite is used in the anode and lithium for cathodes. Benchmark Mineral Intelligence3 estimates that the amount of graphite needed for the anode material in lithium-ion batteries will rocket to 1.75 million metric tons by 2028, an eight-fold increase over 2019 levels. Currently, China controls 71 per cent of worldwide natural graphite supply, 65 per cent of worldwide synthetic graphite supply. Until Europe and US scale up supply, graphite prices will be determined by production in China. The significant demand supply gap will also lead to price spikes.
With the recent reiteration of carbon commitments and scaled up targets on reducing carbon intensity by 2030 by US, UK, Japan and Europe, the focus on decarbonization will intensify, leading to expectations of a large demand shock. Supply woes and concentrated supply of these commodities will mean higher prices over next three to five years before supplies and production starts normalizing. Prepare for commodity greenflation.
1 Greenflationary: Inflation caused by rise in remand for green energy
Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP