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Greenflation: Will metals prices threaten energy transition?

By Fitri Wulandari

Edited by Alexandra Pankratyeva

13:52, 26 January 2022

Stack of steel pipes.
Greenflation: Will metals prices threaten energy transition? – Photo: Shutterstock

Energy transition has increasingly become one of the significant drivers of growth for industrial metals’ prices as global efforts to meet net-zero emission targets by the middle of this century have accelerated the shift to green technologies. 

The push for a transition to a green economy has inadvertently caused “greenflation” or a surge in the price of metals, such as nickel, copper, aluminium and lithium – vital raw materials in the making of electric vehicles (EV), solar panels, wind turbines and other renewable energy technologies. The greenflation phenomenon has raised concerns that the spiralling costs of making clean energy technologies could hamper the effort to contain global warming. 

This article discusses the impact of the energy transition on metals and minerals markets and whether price movements could disrupt the transition from fossil fuels to green energy. 

Why is energy transition sending commodity prices higher?

Renewable energy has become the centre of efforts to wean us off decades of reliance on oil, coal, and gas, the fossil fuels that are responsible for global warming. Energy use – for electricity, heating and transportation – is responsible for 73.2% of global greenhouse gas emissions, according to Our World in Data

flobal greenhouse gas emissions by sector

While green power projects – such as wind turbines and solar panels, along with the shift towards electric vehicles – help cut carbon dioxide emissions, renewable technologies consume more metals in their production than those dependent on fossil fuels.

According to the International Energy Agency (IEA), manufacturing an electric vehicle requires six times more minerals than a car powered by a traditional fossil-fuel driven combustion engine. Likewise, an onshore wind farm needs nine times more minerals than a gas-fired power plant. 

Since 2010, the amount of minerals needed to build power generation capacity has increased by 50%. At the same time, electricity networks are consuming growing quantities of copper and aluminium. 

To meet the Paris Agreement goal “to limit the global temperature increase in this century to two degrees Celsius”, the production of clean energy technologies will demand an ever greater share of global metal production. The IEA estimates that demand will amount to over 40% of all copper and rare earth elements, 60-70% of nickel and cobalt and almost 90% of lithium over the next two decades. 

“As we get more concerned about climate change, we still need to use a lot of commodities to get there,” Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, said in his interview with CNBC, adding that greenflation is one of his top concerns in 2022. 

Greenflation challenges: As demand rises, where is the supply?

While demand is set to surge as more countries pivot towards a green economy, supply may not be able to keep pace. 

The IEA is particularly concerned that the production of energy transition metals is concentrated in a handful of countries. For example, “for lithium, cobalt and rare earth elements, the world’s top three producing nations control well over three-quarters of global output.” 

According to the agency, in 2019, the Democratic Republic of the Congo (DRC) was responsible for 70% of cobalt while China produced 60% of rare earth elements. Moreover, China also has a strong presence across the board in the refining process, accounting for around 35% of global nickel production, 50-70% of lithium and cobalt, and nearly 90% of rare earth elements.

This poses supply disruption risks, with natural disasters or political disturbances within a single nation, such as the recent turmoil in the DRC, having the potential to impede global output. 

Additionally, the IEA suggested that it takes 16 years for mining projects to move from discovery to production, which makes scaling up supplies of these resources unlikely in the short term. 

“These long lead times raise questions about the ability of suppliers to ramp up output if demand were to pick up rapidly,” the IEA said. 

Total mineral demand for clean energy technologies by scenario, 2020 compared to 2040

Growing energy scrutiny

There are also questions about how green the extraction processes themselves will be, not least because of the declining quality of the resources. 

The IEA noted that ore quality has continued to fall across various commodities in recent years. For example, Chile's average copper ore grade has declined by 30% over the past 15 years. This reduction in quality means that extracting the minerals needs more energy, exerting upward pressure on production costs, greenhouse gas emissions and waste volumes. 

Furthermore, the IEA noted that mining companies are now facing more significant environmental and social scrutiny regarding the production and processing of mineral resources. If companies fail to address any concerns voiced, they can lead to action by the community and disruption in supplies. 

We’re already seeing examples of this. In December 2021 mining firm MMG, a wholly-owned subsidiary of Guoxin International Investment, had to temporarily cease production at its Las Bambas mine in Peru – the world’s eighth largest copper mine by capacity – after the company failed to reach an agreement with local communities which resulted in the blocking of the mine’s transport road. The shutdown sent the price of copper up to $9,500 per tonne

“Investors, consumers and civil society increasingly push companies to source minerals that are sustainably and responsibly produced” the IEA said. 

Green transition vs environmental protection

While governments and companies aim to push mining projects to accelerate their production of clean energy metals, these efforts are giving rise to public interest in environmental issues, such as pollution and biodiversity. 

In turn, this will lead to additional scrutiny and rising opposition to mining operations around the world, Sabrin Chowdhury, a senior commodities analyst at Fitch Solutions, said in a webinar on 26 January. 

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“This contradiction between the rising demand for green transition materials and the opposition to new mining projects could lead to a slowdown in new projects progress to a thinner than expected project pipeline and to higher for longer middle prices,” said Chowdhury.

“In turn, this could slow down the progress of the green transition. But we only see all this as a very low risk scenario for now, given the very strong drivers behind the green transition at this point,” she added.

Green projects drive up metal prices

The price of nickel, copper, aluminium and battery-grade metals, such as lithium and cobalt, have hit multi-year highs over the past 12 months, partly due to expanding demand from green technology. 

The price of nickel has risen more than 6% in the year-to-date. On 21 January, it reached almost $24,000 per tonne, an 11-year high, as rising sales of new EVs boosted demand for battery-grade nickel.

In a note on 26 December 2021, Fitch Solutions forecast that nickel’s price would stay in an uptrend over 2023-2027, with prices likely to reach new record highs by the end of this period on persistent output deficits. It said that global battery production would drive growth in the demand for nickel, but that would be offset in part by slowing demand from the stainless steel industry. 

“Class one nickel is definitely in our top list for commodities that we don't have enough supply of going forward and there should be a price spike of that. Definitely it has already started and there will be more rallies in prices of battery grade nickel in the coming years,” said Chowdhury of Fitch Solutions. Class one has 99.8% nickel content and is used in making EV batteries. 

The price of copper has also risen by 21.4% in the one-year frame, although it did not start 2022 on as firm a footing as nickel.

Fastmarkets reported on Monday that lithium prices in China had undergone a six-fold increase since the beginning of 2021, propelled by the surge in demand in the EV sector and the limited availability of spot units. 

Battery-grade lithium carbonate spot price in China was trading at RMB350,000–370,000 ($55,319.35–$58,480.46) per tonne on 20 January, up RMB10,000-20,000 per tonne from a week earlier. The price was also up 300,000–312,000 per tonne or 566.67% from RMB50,000–58,000 per tonne on 7 January  2021, according to Fastmarkets’ price assessment. 

In a note on 13 January, ING Group, citing data from China Passenger Car Association (CPCA), said new EV sales grew by 169% year-on-year in 2021, boosting demand for batteries. 

Nickel, copper, aluminium, lithium and cobalt historical price performance, 10 years

Energy transition impact on commodity markets

Fernando C Hernandez, a technology specialist in energy and the principal at Hernandez Analytica, said that commodity markets could see additional supply pressure from the energy market. According to BP’s 2021 Statistical Review of World Energy report, renewables account for 5.7% of the current energy mix worldwide. According to Hernadez, should that figure increase to 15% or more by 2025, commodity prices would be affected. 

“This will surely cause the price of metals and minerals to increase in the near-term, furthering greenflation,” Hernandez, who is also a business ambassador for Scotland, in America’s Energy Sector, told 

EV and energy transition-centric microgrids that are heavily dependent on rare earth metals and minerals can create near-term supply pressure, as they can be adopted swiftly compared to large-scale renewable projects, he added. 

The supply pressure in the medium and long-term will be significantly influenced and dictated by nations who fulfil their Net Zero declarations, Hernandez believes, along with the corporations that operate within the jurisdiction of said nations.

As an example, he points towards the UK’s decision to be the first major economy to pass a Net Zero law in 2019. Shortly after the decision, BP, based in London, also issued its Net Zero declaration. 

Will the upwards price trend continue?

Compliance of countries to fulfil the climate pact will determine whether or not the supply constraints will ease in the future.

“The commodity markets may go through supply squeezes, impacting greenflation, only to subsequently subside, should nations decide to no longer adhere to the core of the Paris Agreement,” said Hernandez. 

He referred to the Kyoto Protocol of 1992 – the predecessor to the 2015 Paris Agreement – which fell apart due to nations having divergent views on their decarbonisation pathway. 

In November last year, the UN Climate Change Conference in Glasgow, Scotland – known as COP26 – failed to categorically agree on the need to phase out coal due to India and China fixing on a different way of limiting carbon emissions. 

“Succinctly put, having another Kyoto Protocol disbandment, by way of the Paris Agreement, is a tail-risk to consider, and one that can have a bearing on the price of minerals and metals having upwards or downwards price action in the medium- and long-term,” Hernandez said.  

This article does not constitute investment advice. If you are considering investing in green energy projects or popular metals used for green transition initiatives, you must perform your own due diligence when deciding whether to invest. 

Views presented in this article should not be taken as a recommendation to buy or sell particular commodities. Financial markets can go down as well as up due to a number of factors, which cannot always be predicted and can invalidate analysts’ forecasts. Remember, past performance is no guarantee of future results. 

Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in the market and the spread of your investment portfolio. You should never invest money that you cannot afford to lose.

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