The push toward a low-carbon future is shaking up the energy markets.
The almost-certain increase in commodities demand that will accompany the remaking of the world’s energy supply network — from renewable energy and the grids it requires to the ecosystems supporting electric vehicles — is sparking talk of a new commodities super-cycle.
But the dynamics driving prices will be markedly different from those in the last super-cycle, which was spurred by China’s insatiable demand for commodities following its accession to the World Trade Organization in 2001.
Predicted Demand Is Not Enough
According to Montreal-based BCA Research, the commodities required for the transition to a low-carbon energy future — particularly the base metals copper, aluminum, nickel, zinc, lead, and tin — will be in high demand in the coming years, but increasing the supply of these metals is proving to be a challenge.
Producers seem reluctant to commit to higher capital spending, most likely because they’re waiting for demand to actually go up rather than just responding to forecasts. This despite the best efforts of politicians and investors to convince them that the energy transition is real.
Meanwhile, these same actors — along with legal systems worldwide — are discouraging the development of current energy sources, particularly oil, gas, and coal. In the medium term, this will likely translate into a contraction in supply of these traditional energy sources that will be sharper than the decline in demand for them.
BCA also argues that these unique circumstances will not, as some have predicted, result in a commodities super-cycle (in which commodities prices generally rise owing to sharply higher demand and the need to incentivize supply), but instead will simply create bull markets in both commodities and traditional hydrocarbon energy sources. In commodities, the rise in prices will stem from an increasing demand for base metals that will spur the development of new supply, whereas the bull market in hydrocarbon prices will result from supply contracting faster than demand.
The most striking aspect of the transition to a low-carbon energy future is the underlying assumption by policymakers, capital markets, and even consumers that the resources needed to pull off the energy transition are readily available. The mandates for electric vehicles from governments at all levels, and the near-term projections by automakers of a dramatic increase in production of these vehicles by the middle of this decade, demonstrate this supply optimism.
Nowhere is this outlook more apparent than in the market for refined copper, the bellwether base metal common to most of the technologies required for the energy transition. Copper has been in a physical deficit — production minus consumption is negative — for the past six years, in which time the price of copper has more than doubled.
Theoretically, high prices should incentivize increased levels of production. But after an ill-timed investment in new mine discoveries and expansions over the past decade, mining companies have become more wary about investments and are using earnings to pay dividends and reduce debt.
This leads BCA to believe that mining companies will not invest in new mine discoveries but instead will use capital expenditures to expand brownfield projects — that is, projects that use existing facilities — to meet rising demand.
BCA points to a drop in copper quality as evidence. In the past decade, as copper demand increased, capex for copper rose from 2010 to 2012 and then fell from 2013 to 2016. During this time, the copper ore grade declined. This implies that the new copper brought online was being mined from lower-grade ore, thanks to the expansion of existing projects.
Slow and Steady Wins the Race
BCA remains confident that over the medium-to-long term, the buildout of the global EV fleet and the expansion of renewable electricity generation — including supporting grids — will require massive increases in the supplies of copper, aluminum, nickel, and tin, not to mention iron ore and steel. Higher prices for these materials will be needed to incentivize greater output.
BCA has one concern, however: New supplies of metals may not be delivered fast enough to build the renewable generation and EVs (along with supporting grids and infrastructure) necessary to cover the loss of hydrocarbons phased out by policy, legal, and boardroom challenges. Such a turn of events would reinvigorate oil and gas demand and, most likely, incentivize supply at the margin.
Another drawback to the anticipated increase in base-metal prices is the already-high cost of upgrading the current energy infrastructure. Renewable energy and electric vehicles are the sine qua non of the drive to achieve net-zero carbon emissions by 2050. However, the rising price of base metals that BCA foresees will only add to the current high costs of rebuilding power grids to make them suitable for green energy. Given industry reluctance to invest in new mines, the research firm does not expect metals prices to drop anytime soon.
Copper supplies shouldn’t be an issue. Reserves in the ground are abundant and could meet higher demand until 2050, but investments in their development have not been made. In 2020, the total amount of discovered copper reserves in the world stood at about 870 million metric tons, according to the U.S. Geological Survey.
Recent legislative developments in Chile and Peru, which together account for approximately 35 percent of total discovered copper reserves, could lead to higher costs as left-of-center governments rewrite these states’ constitutions. But even if copper mining companies were to move out of both countries, there is still about 570 million metric tons in discovered copper reserves elsewhere, and nearly ten times that amount in undiscovered reserves. But capital is required to develop them.
If prices do stay high, the rush to decarbonize may boomerang on proponents. One of the unintended consequences of the unplanned and uncoordinated rush to a net-zero carbon future could be an improvement in the competitive position of oil and gas as fuels for transportation and electric generation going forward. This development will be driven by the rising costs of developing and delivering the supplies of metals needed to effect a net-zero transition. BCA expects markets to provide incentives for carbon capture, utilization, and storage (CCUS) technologies and for efforts to decarbonize oil and gas fuels, which will contribute to the global effort to arrest rising temperatures.
This suggests that the urgency to sell these assets and divest hydrocarbon holdings — which is currently underway — could be premature.
Robert Ryan is chief strategist, Commodity & Energy Strategy at BCA Research. BCA is a global independent research provider owned by Euromoney Institutional Investor.