investment viewpoints

    The new prize: raw materials for clean tech

    The new prize: raw materials for clean tech
    Paul Udall - Portfolio Manager, Global Equities

    Paul Udall

    Portfolio Manager, Global Equities
    Peter Burke-Smith - Junior Portfolio Manager

    Peter Burke-Smith

    Junior Portfolio Manager

    Need to know:

    • As the world reduces its reliance on fossil fuels, we see an overlooked opportunity for climate-focused investors in commodities vital to clean technology
    • Demand for minerals like lithium will surge with increased use of electric vehicles, and the building of wind and solar infrastructure 
    • Ensuring adequate supply of these raw materials will be a key challenge during the climate transition  

     

    Why commodities are vital to the climate transition 

    Prospective investors in LOIM’s Climate Transition strategy often ask why we invest in commodity companies given their high carbon footprints. The reason: commodities provide the raw materials needed for the electrification of the global economy and reduce our reliance on fossil fuels.

    Clean technologies depend critically on minerals, and the Climate Transition strategy evaluates the entire supply chain to enhance risk-adjusted returns and maximise impact.

    Over the next 30 years, electric cars will probably become the dominant form of personal transportation, replacing vehicles powered by the combustion engine. Minerals are also key to building the storage systems and distribution infrastructure needed for the transition to wind and solar energy.

    The new operators of the global economy – such as clean energy companies and electric vehicle manufacturers – should benefit from such change and are, of course, included in our strategy. We do, however, see an overlooked opportunity in these materials fuelling clean tech.

     

    Huge demand for minerals

    The verb fuelling remains pivotal to a net-zero future, even if the transition is transforming the nature of the fuel. Estimates from the International Energy Agency (IEA) in Figure 1 illustrate clean tech’s massive dependence on minerals. Electric cars require about six times the mineral inputs of conventional cars, while an offshore wind plant requires 13 times more than a similarly sized gas-fired power plant.

     

    Figure 1. The shift to a more mineral-intensive energy system

    CTF-Raw materials for clean tech-Minerals used-01.svg

    Source: IEA.

     

    Which minerals will be highly sought after? By 2040, demand for battery materials such as lithium is expected to be around 40 times higher than it was in 2020.1 Copper demand could grow by around 600% by 2030, though the range of forecasts is wide.2

    Sustainable steel is another sector we like, given that steel accounts for roughly 20% of the cost of manufacturing a wind turbine. We focus on electric-arc furnace technology, where the carbon footprint is 10 times lower than from blast furnace (coal-based) steel production. We are also closely watching developments in hydrogen-based steel technology.

     

    Challenging supply outlook 

    The surge in demand looks likely to meet a sticky supply picture. Producing more copper takes time: extending existing mines takes around three years and a greenfield project takes eight.

    Given the current production outlook for copper, lithium and cobalt (Figure 2), a substantial deficit emerges under the IEA’s Sustainable Development Scenario.

     

    Figure 2. Committed mine production and primary demand for selected minerals

    CTF-Raw materials for clean tech-Commited production-01.svg

    Source: IEA.

     

    We believe these supply-demand dynamics strongly favour the structural performance of mining equities but are aware that the sector is inherently very cyclical and has a poor record in capital allocation. Therefore, we focus on correctly sizing our allocations; but with strong cash generation and very attractive multiples relative to the pureplay clean technology companies, we see the critical materials as a key area of investment for climate portfolios.

     

    The role of engagement

    Mining is a hard-to-abate sector for emissions, and decarbonisation is a key area for engagement. We have had positive discussions with mining companies where we encourage them to address gaps we see in their net-zero strategies. The weakest area for this industry is around scope 3 emissions reductions, where targets (when they exist) trail behind those set for scopes 1 and 2. We push companies to address this in earnest by focusing on partnerships with peers, joining industry associations and putting initiatives in place that will contribute effectively to scope 3 reductions.

    Through our discussions with a large miner, for example, we learned that the company has developed what it calls the world's biggest hydrogen-powered mine haul truck – which generates more power than diesel-powered ones. We are encouraged by these types of exciting solutions and will push for more.

    At a higher level, we remain convinced that adequate board composition (comprising the relevant climate transition skills) and executive remuneration policies (including a variable pay climate component) are crucial in these efforts.

    The climate transition vitally depends on companies meeting their decarbonisation targets, which is why engagement is so key to the effective running of a climate portfolio.

     

    Avoiding negative outcomes  

    To be sure, clean technology is not without its own environmental costs. Side effects of lithium mining, for example, include water and biodiversity loss, contaminated soil and toxic waste.3 Scientists have raised concern about potential ocean damage as the scramble for raw materials drives up interest in deep-seabed mining.  

    As demand for these minerals grows, so should efforts to adopt safeguards and conduct so-called DNSH (do no significant harm) tests to avoid harming local communities and the natural world.  

    Greater investment in recycling and the development of the circular economy will also help here, both in limiting environmental damage and in maintaining adequate supplies.

     

    Sources

    [1] IEA.

    [2] Goldman Sachs Research.

    [3] The side effects of lithium mining | Wellcome Collection.

     
     

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