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    Raw materials: Investing in the Shift from Brown to Green

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    CAPITAL AT RISK. MARKETING MATERIAL

    The transition to a low-carbon economy requires a material revolution in the energy landscape. It is evident that materials contribute to the global emissions problem, but they are also a critical part of the solution. The world needs wind turbines, batteries for electric vehicles (EVs) and solar panels, and metals and materials are essential building blocks for such low-carbon technologies. As demand increases and companies actively work to reduce their carbon footprints, investors could be presented with a unique investment opportunity.

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    Based on current energy policies the demand for these minerals is expected to more than double by 2040, according to the International Energy Agency (IEA)1. The IEA also expects that current demand could even triple should governments’ stated environmental pledges be put into effect, and potentially grow by a factor of five if governments strictly adhere to the IEA’s 2050 net-zero pathway.

    There is no guarantee that any forecasts made will come to pass.

    Source: BlackRock Investment Institute and IEA, December2022.

    Note: The chart shows the IEA’s estimates of demand – under three scenarios – for selected minerals in 2040 vs. demand in 2020. The three scenarios include: “stated” – which consider how energy supply evolves without additional steering from policy makers by 2040; “sustainable” -announced pledges that take into account climate commitments made by governments up to early October 2021 by 2040; and “net-zero2050” – capacity additions needed by 2040 to meet the goal of achieving net zero emissions by 2050.

    Given the extractive industry’s large carbon footprint, there is a danger that moving away from fossil-based energy may simply shift the emissions problem towards the point of production.  For example, while the electrification of vehicles does help to significantly reduce their in-use (Scope 3) Green House Gas (GHG) emissions, the total lifecycle emissions of EVs include those of the electricity used to charge them as well as the materials and energy used in their manufacture.  The greening of electricity generation is already well underway, so there now needs to be a greater focus on decarbonising the extraction and production of the materials used in making EVs and their batteries.  Demand for metals and rare earth elements essential to power grids and renewable energy technologies is expected to grow as the low-carbon transition accelerates.  This may represent a potential opportunity for investors interested in capturing this growth opportunity while helping to finance the global transition.

    Alongside the growth opportunity are the potential gains from the re-rating of high GHG emitting companies as they implement greener practices. Utilities, materials, and energy firms are among the sectors exhibiting the highest emissions. With the materials sector being key to the low carbon transition, it could represent a convincing combination of alpha drivers. BlackRock2 has pinpointed three types of companies belonging to the universe of companies which will benefit from the transition to a green economy (the ‘brown-to-green’ investment universe):

    1. Emissions reducers: producers aiming to reduce their GHG emissions over time.
    2. Enablers: firms providing materials or technologies to support this emissions reduction.
    3. Green leaders: companies that are leading the field in lower-emission materials production.

    While many of the raw materials needed by the renewable energy sector are relatively plentiful3, there is a lack of cost-effective, high-quality projects to develop these resources and bring them to market4. Unless this shortfall is addressed, certain materials such as copper could soon run into supply issues. The IEA estimates that cumulative capital investment of $360-450 billion in critical minerals will be needed by 20501, with more than half of that amount needed for copper alone.  Bridging this financing gap by focusing on the emissions reducers, enablers and green leaders may represent potential investment opportunities.  The shift towards renewable energy generation such as wind and solar requires more copper than the incumbent fossil fuel powered grids.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular. Forward looking estimates may not come to pass.

    Copper required per unit of power capacity (Tonnes per megawatt)

    Source: BHP analysis, August 2023.

    The growth in output from the materials industry must be accompanied by a wide-ranging effort to reduce the sector’s carbon footprint.  According to IEA figures, materials extraction and production accounted for 17% of global GHG emissions in 2022, a share that is expected to grow as other sectors abate their emissions and demand for raw materials continued to grow apace.  What can steel producers do to move from ‘brown’ to ‘green’ value chains?  The first stage of a decarbonisation process can involve the introduction of renewable power sources, waste heat recovery and the recycling of energy-rich gases.  Steel manufacturers can also invest in higher-quality raw materials to improve production efficiency.  The second stage implies a partial transition towards low-carbon technologies such as biomass or hydrogen within furnaces, as well as carbon capture, use and storage (CCUS) technology to further reduce remaining GHG emissions.  The third and final stage that steel producers aim for is a complete transformation of their value chain. This would typically require major capital investment in green hydrogen power or the electrification of furnace technology.

    According to Black Rock2, in the utilities sector, companies pivoting away from fossil fuels toward renewables have seen an uptick in their valuation multiples, suggesting a positive trajectory that could be mirrored in higher-carbon sectors like European steel. While many steel manufacturers have begun this journey towards greener production methods, the copper industry is languishing behind. Although copper is essential for the transition of the energy sector and their related power grids, the number of copper mines currently operational may not be sufficient to meet demand.  There is therefore a pressing need for new investment and the return potential for new projects in this space may prove to be considerable. The current stock and growth in the number of battery-powered vehicles predicts an increase in the need for battery recycling in the near future. This means that investors could also benefit from these emerging needs, where specialist firms are already benefiting from rapid growth in demand.

    The nascent transformation of the materials sector could be greatly accelerated by concerted government action. Positive incentives like subsidies or tax credits can be accompanied by the pricing of GHG emissions via carbon taxes to create the right economic incentives for the market to shift towards the implementation of greener technology.  With the sensible application of such ‘carrot and stick’ measures, governments can help create the right environment for forward-thinking materials producers to flourish, thereby supplying a opportunity-rich sector for savvy investors.

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    Sources:

    1. International Energy Agency: Mineral requirements for clean energy transitions, December 2022
    2. BlackRock, The brown to green transition, 5 October 2023.
    3. Bloomberg, 2023
    4. Goldman Sachs, Supply and Demand Forecast, 7 October 2023.

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    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.
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