The energy transition is in full swing, with electric vehicles supplanting gas guzzlers and solar panels and wind turbines replacing coal and oil as the world’s leading energy sources. Scientists have warned that keeping temperature rises to 1.5C requires global emissions to be cut by 45% by 2030 and to zero overall by mid-century. In the ongoing COP26 climate summit, nations have promised to end deforestation, curb CO2 and methane emissions and also stop public investment in coal power.
The energy transition is driving the next commodity super cycle, with immense prospects for technology manufacturers, energy traders, and investors. Indeed, new energy research provider Bloomberg NEF estimates that the global transition will require ~$173 trillion in energy supply and infrastructure investment over the next three decades, with renewable energy expected to provide 85% of our energy needs by 2050.
But nowhere is the outlook brighter than the metals industry.
Clean energy technologies require more metals than their fossil fuel-based counterparts. According to a recent Eurasia Review analysis, prices for copper, nickel, cobalt, and lithium could reach historical peaks for an unprecedented, sustained period in a net-zero emissions scenario, with the total value of production rising more than four-fold for the period 2021-2040, and even rivalling the total value of crude oil production.
There’s a big negative for the fossil fuel sector--BNEF has forecast that electric and fuel cell vehicles will displace 21 million barrels per day in oil demand by 2050
Source: Eurasia Review
In the net-zero emissions scenario, the metals demand boom could lead to a more than fourfold increase in the value of metals production–totalling $13 trillion accumulated over the next two decades for the four metals alone. This could rival the estimated value of oil production in a net-zero emissions scenario over that same period, making the four metals macro-relevant for inflation, trade, and output, and providing significant windfalls to commodity producers.
Estimated cumulative real revenue for the global production of selected energy transition metals, 2021-40 (billions of 2020 US dollars)
#1. Solar Panels
KEY METALS AND MATERIALS: Steel, Aluminium, Polysilicon, Copper, Silver
TOP ETF: Invesco Solar Portfolio ETF (NYSEARCA:TAN)
BNEF estimates that it takes 10,252 tons of aluminium, 3,380 tons of polysilicon and 18.5 tons of silver to manufacture solar panels with 1GW capacity. With global installed solar capacity expected to double by 2025 and quadruple to 3,000 GW by 2030, the solar industry is expected to become a significant consumer of these commodities over the next decade.
An unexpected jump in demand for solar panels from late 2020 due to renewed carbon commitments by the Biden administration and China have led to a surge in the price of polysilicon and disrupted the decade-long falling costs of solar installations. According to a new report by the Solar Energy Industries Association and Wood Mackenzie, supply chain bottlenecks and rising raw materials costs have hit the U.S. solar industry, as solar prices rose Q/Q and Y/Y during Q2 across every U.S. market segment. This marks the first time that residential, commercial, and utility solar costs have increased together since Wood Mackenzie began tracking prices in 2014. The most significant cost pressures came from rising prices for raw materials, including steel and aluminium.
Several new polysilicon plants, mostly in China, are currently under development and are expected to bridge part of the supply gap. However, the current shortfall is a clear signal that a lot more needs to be done as the decarbonization and electrification drive accelerates.
Luckily, BNEF analyst Yali Jiang says fundamental shortages of polysilicon are unlikely to become a long-term problem since prices always drive more capacity. BNEF says it’s more concerned about other auxiliary materials in solar panel production and installation that use silver, aluminium, and steel, etc., since these metals are subject to the wider commodity world.
#2. Wind Turbines
KEY METALS AND MATERIALS: Concrete, Steel, Glass Fibre Reinforced Plastic, Electronic Scrap, Copper, Aluminium, Carbon Fibre Reinforced Polymers
TOP ETF: First Trust Global Wind Energy ETF (NYSEARCA:FAN)
It takes about 154,352 tons of steel, 2,866 tons of copper, and 387 tons of aluminium to construct wind turbines and infrastructure with the power capacity of a gigawatt as per BNEF estimates. The Global Wind Energy Outlook (GWEO) has forecast installed wind capacity to hit 2,110GW by 2030, representing a 185% growth over the timeframe.
Just like the solar sector, rising cost pressures are beginning to negatively impact the rollout of wind projects, which coupled with the expiry of key subsidies in China, is expected to lead to record capacity additions dropping, according to the Global Wind Energy Council.
In fact, Denmark’s Vestas Wind Systems A/S (OTCPK:VWDRY), one of the world’s biggest turbine producers with 31% share of the global market, recently cut its outlook for the rest of 2021, citing rising raw materials prices and disruptions to supply chains. In August, Vestas lowered its full-year revenue guidance to €15.5B-€16.5B from its previous forecast of €16B-€17B and expected EBIT margin to 5%-7% from its previous outlook of 6%-8%.
A big part of the rising costs can be pinned on steel, with steel prices having jumped in the U.S. this year and also advanced in China and Europe.
But here again, the long-term outlook is bullish, with BNEF saying capacity additions will recover and reach an annual clip of 129 gigawatts by 2030.
“Commodities inflation is here. Beyond the next 12 months, it is now about seeing both that the projects can and will be built, and also what’s the price? ”Henrik Andersen, Vestas Wind’s chief executive officer, has posed.
#3. Lithium-Ion Batteries