Critical materials for the energy transition
The global energy transition currently underway is a physical one that will need to be built. But what are the building blocks, and where do these critical materials for the energy transition come from?
Building blocks for the energy transition have different roles to play
Building blocks for the energy transition have different roles to play
The three main investment growth drivers of the energy transition are as follows:
1. Decarbonizing energy consumption via electrification
This means for example switching from gasoline-powered cars to electric vehicles (EVs), switching from natural gas to electricity to generate heat for domestic or industrial purposes, etc. They will all require massive investments in renewable and low-carbon electricity generation.
2. Decentralizing the grid
In order to accommodate this electrification, investments in smart grids, new connections, and grid storage will be required. Homeowners will become power generators as they install rooftop solar systems, requiring a two-way grid; new offshore wind capacity must be able to transport electricity to shore via high-voltage submarine cables; intermittency in solar and wind power generation patterns means that batteries will have to store electricity for use when there is not enough sunlight or wind, etc..
3. The abovementioned electrification of energy and renovating of the grid cannot happen without investment in critical materials.
The energy transition requires key ingredients, with the main ones including:
- Aluminum – used for lightweighting appliances and EVs, as well as for electricity transmission
- Copper – used for electricity transmission, application wiring, as a battery current collector, in solar inverters and in wind turbines
- Lithium, cobalt, nickel, and manganese – used as the active cathode material in lithium-ion batteries,1 as well as in hydrogen electrolyzers and geothermal power (nickel)
- Graphite – used as active anode material in batteries
- Rare earth minerals – used as permanent magnets in EV motors and wind turbines
Metals of the future
Metals of the future
Metals of the future are revolutionizing the way we generate and store energy. New technologies are redefining the renewable energy and battery industries, driving advances in energy storage, electric mobility, and clean power generation, thus presenting a new set of challenges and opportunities for investors.
Demand for critical materials is set to rise sharply in the coming decades
Demand for critical materials is set to rise sharply in the coming decades
The International Energy Agency (IEA) estimates that there will be a minimum four-fold rise in overall mineral demand for clean energy technologies so that global climate ambitions can be met. It also forecasts particularly high growth for EV-related minerals such as lithium, which will see demand rise nearly 42-fold, graphite (nearly 25-fold), cobalt (over 21-fold), and nickel (almost 20-fold)2
Figure 1: Growth in demand for selected minerals in the IEA Sustainable Development Scenario, 2040 relative to 2020
Note that the IEA has not included aluminum demand in its outlook for transition metals. According to Bloomberg New Energy Finance (BNEF),3 demand for aluminum is set to more than double by 2050 under the Economic Transition Scenario (ETS) and Net Zero Scenario (NZS) in its BNEF New Energy Outlook 2022.
Supply of critical minerals is concentrated in a few regions, but not without risk
Supply of critical minerals is concentrated in a few regions, but not without risk
We believe the energy transition brings a tremendous opportunity for investments in critical materials as supply growth will have to rise significantly in the coming decades. However, this opportunity does not come without risks: many of the critical materials needed for the energy transition are in a handful of countries,4 bringing considerable political and geopolitical risks (such as trade wars,5 resource nationalization,6 and tax and royalty risks7).
Figure 2: Mineral reserves and mining production in 2021
Apart from the traditional resource-related and project development risks, bringing new mineral resources onstream takes time, and tight supply-demand balances or supply deficits can easily arise when lead times for new projects, from discovery to production, increase. Stricter permit-related standards, tougher environmental licensing (water stress, biodiversity impacts, energy intensity of smelting operations, greenhouse gas emissions), greater emphasis on safety and sustainability standards (governance, human rights, and labor laws), and tight mining equipment supply chains are all putting upward pressure on the delivery timeframes of new resource-related developments.
However, thanks to government initiatives such as the US Inflation Reduction Act (IRA) and the EU Critical Raw Materials Act (CRMA), western economies are rapidly pushing ahead with the development of domestic resources and increasing local capacity to source and refine critical raw materials for the energy transition. This also means reducing dependence on key players such as China, which dominates the EV battery supply chain with two-thirds of global battery cell production as well as around 80% of the production of cathode and over 90% of anode material.8
Massive investment is still needed to avoid bottlenecks
Massive investment is still needed to avoid bottlenecks
As strong demand is set to be met by limited supply, we expect production gaps and supply deficits to trigger higher prices, incentivizing investment in new developments. According to IEA, a total cumulative investment of USD 360 to 450 bn in mining and critical material production is required to bring the necessary capacity online in just four key transition materials by 2030, compared to just USD 180 to 220 bn of anticipated investment, implying an investment shortfall of USD 180 to 230 bn.9
Figure 3: Anticipated and required investment in mining critical minerals by region/country
No energy transition without critical materials
No energy transition without critical materials
The global energy transition is a physical one: it must actually be built. Whereas massive investment in clean technology manufacturing and clean energy supply chains and networks will be required, no energy transition is possible without investment in the critical material building blocks needed to move toward a cleaner economy and society. We believe that investments in critical materials companies should be part of a full-value-chain energy transition strategy.
About the author
Dirk Hoozemans
CFA, Senior portfolio manager, Thematic Equities
Dirk Hoozemans (MA, CFA, ESG CFA), Director, is Lead Portfolio Manager of the Energy Evolution strategy. In 2022, he joined Credit Suisse Asset Management, now part of UBS Group, from Triodos Investment Management, where he was fund manager of a global small- and mid-cap-focused thematic impact strategy and responsible for outlining a new impact-driven investment process, including ESG integration and active ownership policies. Prior to that, Dirk held various portfolio management positions at Robeco Asset Management, including portfolio manager of a global energy strategy. Dirk holds a master’s degree in Econometrics from Tilburg University, The Netherlands, is a CFA charterholder, and has obtained the CFA Institute Certificate in ESG Investing.
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