Decarbonisation has quickly become one of the most important topics for governments around the world. After dealing with one global crisis, leaders across the globe are working quickly to avoid another. The Paris climate agreement has its member nations working toward carbon-neutrality by 2050. The UK will ban the sale of all new combustion-engine vehicles by 2030. And last year, Beijing shocked the world announcing it would be carbon-neutral by 2060. 

As Alphinity's Elfreda Jonker put it recently "If you want an electric vehicle? You need lithium, nickel and cobalt. Want a wind farm? You need aluminium and rare earth. Want to recharge anything? You need copper."

To help identify the best way to take advantage of this, I reached out to three experts to find out which commodity inputs will be key to powering a decarbonised world. Responses come from:

• Mike Jenneke, Credit Suisse
• Raf Choudhury, State Street Global Advisors
• Tim Gerrard, Janus Henderson

Base metals to lead the way

Mike Jenneke, Credit Suisse

The precise path of decarbonisation continues to evolve and will depend in part on technology development and the degree to which carbon pricing policy influences the outcome. We should also acknowledge the lengthy timeframe required to implement this shift introduces uncertainty as to the specific role and quantum of commodities required for near-term demand, decarbonisation transition and sustaining a net zero position in the long-term. What we know with reasonable certainty is fossil fuel demand will decline significantly in favour of renewable energy, electrification will rise and use of batteries will be significant.

From a mining perspective, we have confidence in an added layer of demand for base metals from decarbonisation. Demand for renewables, higher electrification and greater use of batteries will add to demand for volume metals such as copper, aluminium and nickel. Batteries are likely in a demand super cycle with very substantial requirements for the smaller lithium, graphite, cobalt and rare earths commodities. Lithium for example could be 10 times current demand by 2030 if electrical vehicle penetration rises significantly. Given these demand trends supply deficits risk emerging across these commodities from the middle of the decade.

Governments need to act 

Raf Choudhury, SSGA

The net zero target is one where carbon emissions are equivalent to the amount of carbon extracted from the atmosphere. There is an increasing trend towards carbon reduction. However, the net zero by 2050 targets set by many governments will not be met unless there is a dramatic change in our energy mix.

Over the next 5-10 years and based on existing plans and technology, we see increased demand for the following key commodities as broader trends take hold:

• Lithium, nickel, cobalt, and copper as electric vehicles replace the combustion engine
• Platinum as a catalyst for green hydrogen
• Silver for solar
• Rare Earths and copper (again) for wind
• Potash and Phosphate to enhance crop yields as more land is removed from cultivation to grow forests and act as a carbon sink.

The amount of additional supply required will differ depending on how policies play out but the overall trend is currently supportive for all of the above. In particular, lithium demand is expected to triple by 2025, while cobalt demand is expected to double over the same period. Absent demand rationing, on a 3-5 year view, metals that are potentially tightest from a supply perspective are nickel, cobalt, platinum and potentially silver, with the imbalance between supply-and-demand likely to drive prices higher.

Decarbonisation of the power and mobility sectors only part of the story

Tim Gerrard, Janus Henderson

To drive decarbonisation goes well beyond the traditional view of key commodities. It is true that copper, aluminium, certain types of nickel, cobalt and lithium will be important (unless technology steps in). Commodities such as aluminium are needed to help lighten vehicles, copper wiring for electric motors and offshore electric cables connecting wind power to consumers, lithium, nickel and cobalt for electric vehicles (EVs) are all part of the staple diet to help decarbonisation. 

Copper demand could increase by 4-6Mt between now and 2030, significant in a 22Mt per year market. Lithium could increase over ten times, in excess of 3.5Mt per year in a market that today is only 0.35Mt per year.

However, decarbonisation of the power and mobility sectors is only part of the story. Consider sectors such as steel and cement where it is impossible to produce such important building blocks without producing massive amounts of carbon. These are referred to in decarbonisation terms as ‘hard to abate’ sectors.

These sectors need research and development, collaboration and ‘human resources’ to find breakthroughs. In the meantime, mitigating carbon footprints as much as possible may be the best idea.

Companies that recycle steel and aluminium have an important role to play, which is quite apart from those companies producing steel and aluminium from scratch. I should point out that decarbonisation is not about targeting zero emissions, but rather it is a target of net zero in recognition of these hard to abate sectors.

What are some key commodities that can provide the offset? It’s mainly afforestation (establishing forests where none previously stood). BHP calculates that in order to get the required offset in a world restricted to a 1.5 degrees global warming target, then by 2050 an area half the size of Australia would need to have been planted.

Commodity inputs to reduce carbon emissions are not only those that immediately come to mind. Metals and paper recycling, carbon locked up in forestry and changed agricultural practices are required and form part of the opportunities available to investors.

Stay tuned for more