Which technologies will prevail? What materials will be required to enable those technologies? These are just two of many questions yet to be answered.
One thing we know is that decarbonisation will be mineral intensive. The world is switching from a fossil fuel-based power system to one which is essentially metals-based. The power source may be wind and solar, but wind turbines are 70% steel, while copper is required to generate and carry the electricity.
It amounts to what we might call a ‘shock of the old’. In the 1980s, a BBC television series titled ‘The Shock of the New’ explored European society’s encounters with modernism in art. In today’s economy, the clash of cultures is closer to the opposite: an economy increasingly focused on transitioning to a clean-energy future is having to grapple with old industries with old business models and old technologies that are essential for enabling that transition.
The intensifying focus on tackling climate change has combined with other, nearer-term factors to put the spotlight back on commodities:
- Pandemic stimulus packages have led to consumers buying durables and to governments promising green infrastructure.
- Logistics bottlenecks have highlighted the weaknesses in just-in-time global supply chains, leading companies to consider larger inventories and even on-shoring.
It adds up to a complex backdrop for materials markets. We believe there will be many opportunities for commodity investors as the energy transition progresses, but they will not always be obvious. And those looking to capture them need to be active and careful, because supply/demand balances are volatile and long-term structural themes will continue to crash into short-term stocking cycles.
As active investors, our aim is to pinpoint where capital is most needed and will generate the best returns. That does not only mean identifying the right technologies and materials. We also need to work out which companies are making a success of the decarbonisation-driven trends in their sector and are able to generate good returns on capital.
This report examines two commodity markets that are essential to the net-zero transition, copper and steel, and considers the investment outlook.