TILLMANN GALLER: The clean tech transition will trigger a new commodities supercycle

Most of the focus in discussing the transition to net zero has been on how energy companies will manage the decline in demand for fossil fuels. Yet commodities and their producers will be at the centre of this transition, as enormous demand is being created for the metals and minerals needed to build renewable energy infrastructure and electric vehicles (EVs). 

This development presents compelling opportunities for investors who want to position their portfolios to benefit from the journey to net zero. 

The resources powering the energy transition 

Replacing fossil-fuelled power generation with clean energy fundamentally changes power generation from a fuel-intensive to a materials-intensive system. Switching from a coal-fired power plant to offshore wind power generation requires six times the amount of mineral commodities (copper, zinc, nickel, chromium and rare earths); for a gas plant it is 13 times more.

Solar capacity is less resource-intensive but it still consumes three times more minerals than building coal plants. Building new gridlines to connect the world’s electricity supply and demand will require significant amounts of copper and aluminium.

The transition from combustion engines to battery-driven vehicles shows a similar pattern. Compared with a conventional vehicle, an EV requires six times as many minerals (lithium, nickel, cobalt, manganese and graphite), which are critical commodities for battery production.

Estimating the speed of the transition to size the demand 

In addition to materials intensity, the speed of the transformation is crucial for estimating future commodity demand. Even the most conservative growth scenario for clean energy assumes that current policy trends continue, which would require a 50% increase in global renewable generation capacity for electricity production by 2030. 

The rate of change in the automotive market is even faster, though uncertainty around which battery chemistry will prevail in the next 10 years slightly complicates the projection for materials demand. Based on the projected growth in demand for EVs and plug-in hybrids as legislation and subsidies from policymakers around the world come into effect, demand for critical metals is forecast to increase by almost 70% by 2030, even in the most conservative scenario.

In an accelerated transition, demand for critical minerals could rise 70%-110% by 2030, on top of the 50% increase in the past decade. 

The impact of corporate behaviour on supply 

Global reserves of critical minerals are large enough to cover the resource needs of the global transition to carbon neutrality, but it is uncertain whether mining companies can cope with this huge increase in demand over the next 10 years. They have reduced their investments relative to sales in recent years, for several reasons. 

First, after the last supercycle balance sheets of many resource companies were highly leveraged due to high investment activity and expensive acquisitions. Management was eager to reduce the debt load. Second, the Paris Agreement tightened environmental regulation and increased public and investor awareness about the environmental damage of exploration and extraction. As a result, mining and energy companies now prefer to distribute corporate cash flows to shareholders rather than invest in new projects that risk regulatory scrutiny and public backlash. 

Muted investment activity is jeopardising the future supply of critical minerals because it takes three to 10 years to develop a lithium mine and five to 15 years for copper, nickel and other industrial metals. The capex shortfall of the past four years could translate to a supply shortfall between 2025 and 2030. In the short term, the most critical commodity markets look sufficiently supplied.

However, even in the lower-bound scenario for demand growth, several critical commodities such as copper, nickel, cobalt and lithium are expected to be in short supply at the end of the decade. If policymakers implement more ambitious net zero strategies, several commodity markets could move into deficit within three years. 

Outlook for commodity prices and investor implications 

Even the most conservative demand acceleration scenario will deliver a significant tailwind to commodity prices in the coming years. Spot prices in industrial metals have already been rising in recent years. We believe the clean technology transition is igniting a new supercycle in critical commodities, with natural resource companies emerging as winners. 

In summary, climate change policies will cause an enormous redeployment of investment and capital, and businesses across the whole clean technology supply chain should benefit. Just as the market is pricing in a huge disruption in the global vehicle industry, valuations in the mining sector at eight times earnings do not look demanding.

A new commodity supercycle could underpin a secular shift in the global economy and an equally seismic rotation in equity markets from growth towards value companies. 

• Galler is global market strategist at JPMorgan Asset Management, strategic offshore partner to Stanlib Asset Management.