There are 36 elements on the periodic table that are defined as “transition metals”, a distinction that is somehow linked to the way in which their electrons behave – but that’s enough of the science. For the purposes of this summary, we will be looking at four metallic elements that are deemed crucial to the planned energy transition and their long-term pricing prospects. The accompanying chart reveals how erratic pricing for these metals has become in recent times, and there is every chance this volatility will be a feature of the market for some time to come. Yet the projected supply/demand balance is clearly in their favour on the pricing front.
We can’t be sure how the decarbonisation agenda will play out over time, but it could conceivably provide an investment opportunity analogous to the now defunct commodities super-cycle that commenced in the early 1990s. Although there are any number of material inputs vital to the ongoing transition, we will look at market prospects for the most commonly referenced metallic elements: cobalt, nickel, copper and lithium. This consideration alone should provide some insight into the likely trajectory of prices, although it cannot take account of potential supply-side shocks. It would be naïve to imagine that the push towards net-zero will not entail upward pressure on energy prices, both in terms of demand-pull and cost-push inflation, while any future outages in supply would have profound political implications.
The first point to take on board is that any successful transition will require a collaborative approach by governments and businesses. Numerous governmental and corporate timetables are now in place, but the practical hurdles linked to the transition are becoming more evident by the day.
Nevertheless, recent analysis by McKinsey & Co projects that demand for lithium, nickel and cobalt (the core battery metals) is expected to increase by 8.0 times, 2.0 times and 1.8 times, respectively, while “the growth in demand for copper and nickel will require $250bn (£197bn) to $350bn in cumulative capital expenditures by 2030”. The projected multiples and capex requirements are both supportive of prices going forward.
The research indicates that there are abundant reserves of the metals from a geological standpoint (including on the seabed), although investors should consider average ore grades when making determinations on price trends. Industry analysis shows that the average copper ore grade is decreasing over time, placing upward pressure on extraction costs. To make matters worse, ore reserves at some of the largest copper mines are in decline, as production has fallen due to capital-intensive projects designed to move operations from open-pit to underground as the mines age.
According to Statista Research, the dollar value of the global copper market is set to increase by one-third between now and 2030, while separate analysis from both McKinsey and Rystad Energy point to a global supply shortfall of more than 6mn tonnes by the end of the decade, equivalent to 20 per cent of anticipated production, or the annual output of Chile, the world’s top producer. On average, electric vehicles use up to four times more copper than regular gasoline vehicles and renewable energy systems utilise up to five times the amount of the metal needed for traditional power generation sources. And that last multiple doesn’t take account of the additional copper needed to connect wind and solar power sources to existing energy grids.
Even with enhanced extraction techniques, the copper supply-side deficit is forecast to rise significantly through to 2050, by which time we’re all expected to be in net-zero territory. It’s a tough ask.
Naturally, the energy transition has been drawing the attention of global policymakers. Analysts at the International Monetary Fund believe that supply of transition metals will not be responsive to price changes in the short term, “especially for lithium”, although elasticity of supply should increase over time. They go on to point out that “based on metal-specific demand shocks embedded in a structural scenario analysis… cobalt and nickel could rise several hundred per cent compared with their average 2020 levels in a net-zero emissions scenario”.
