Sycomore AM - Energy transition metals and minerals: new strategic issues

Metals and minerals are at the core of many global economic, social, and geopolitical issues

Sycomore AM, 27 Feb 2023 - 10:00

While Europe is striving to become independent from Russian energy, new dependency issues have emerged. Before the war in Ukraine, Russia was the European Union’s leading supplier of fossil fuels, accounting for around 40% of gas imports, 20% of oil imports, and 70% of thermal coal imports.

The response from the EU, through its RePowerEU plan, involves increasing electrification throughout the economy (notably for heating, mobility, and industry) and accelerating the development of renewable energies. Naturally, this has ushered in other geopolitical, environmental, and social implications.

It is believed there are over 4,000 different minerals on Earth, many of which have metallic components. Metals are elementary substances, such as gold, silver, and copper, which are crystalline when solid and are frequently found in minerals.

Being essential to modern life, metals and minerals have now taken on a strategic dimension, particularly as they feature in so many transition enabling technologies - notably for renewable energy and the electrification of transport.

Metals and minerals are essential for the deployment of green technologies

Known to be good conductors of electricity and heat, metals are naturally present in many technologies; their use is therefore expected to grow massively in the context of the energy transition.

Technologies such as power grids, solar panels, wind turbines, electric cars, storage batteries… are metal intensive. For example, a wind turbine contains copper, steel, aluminum, zinc, neodymium, dysprosium, and terbium. An electric car requires 6 times more minerals than a conventional vehicle. Offshore wind farms require 10 times more minerals than gas power stations.

Copper is also a critical metal for the energy transition, both for renewable energy technologies and for the transmission and distribution of electricity. Copper can be found in relative abundance in the earth’s crust. Lithium, on the other hand, is present in electrical batteries, as are cobalt and nickel.

The International Energy Agency (IAE) has assessed the growth in global demand for metals and minerals according to different scenarios: the current trend (2040 - Stated Policies Scenario), a +2°C pathway (2040 – Sustainable Development Scenario) and a +1.5°C pathway (2040 – Net-zero by 2050 scenario).

Furthermore, the IAE has projected that in a +2°C scenario, demand for the minerals used in electric cars and batteries would increase 30-fold by 2040, with lithium most in demand.

Critical materials and dependencies

The European Union and the United States have drawn up a list of critical raw materials, and most of these are metals. A raw material is deemed critical when it is used in many sectors of industry, when there are no easy short-term substitutes, when its economic value is high, and if supply and production are concentrated geographically. The EU also takes into account the “country risk” associated with suppliers, which covers environmental factors and trade restrictions.

These critical raw materials include lithium, magnesium, cobalt, titanium, and several rare earths. The economic criticality of lithium, for example, is largely due to the concentration of reserves, with 5 players owning 90% of the market. It is also due to the lack of transparency on pricing. On the other hand, cobalt carries a high level of geological criticality, but even more importantly, supply could be restrained due to geopolitical tensions around the material. More than 70% of the world’s resources are in the Democratic Republic of Congo (DRC).

The European Commission is working on diversifying supply, reducing dependencies on other countries, and improving the efficiency and circularity of resources:

The first objective is to favor supply from within the European Union – where many metal resources are currently unmined.

In addition, the European Commission tends to partner up with third-party exporting countries. These partnerships will allow the latter to develop their mineral resources sustainably, while building trust-based relations with the EU.

Finally, the EU is investing in its recycling industry and in innovation. In 2020, over 50% of several metals – including steel, zinc, and platinum - were recycled, and already weighed over 25% of the EU’s total consumption.

How should investors be positioned on energy transition metals?

On the corporate side, some companies do apply best practices. Sycomore AM’s proprietary fundamental analysis model, SPICE, enables portfolio managers to consider all extra-financial factors specific to the sector when making investment decisions.

The NEC, Net Environmental Contribution - the compass for navigating the transition

To assess the environmental impact of companies operating within the metals and minerals sector, Sycomore use the NEC – a multidimensional indicator measuring the extent to which a given activity contributes to the environmental transition. Applicable to all occupations and all asset classes, the NEC ranges between -100% and +100%; it covers climate change, but also biodiversity, including water usage and pollution, and resources, such as the management of waste.

These criteria naturally apply to companies operating within the metal and minerals industry, to ensure investors only select players fostering an economy that is both carbon frugal and respectful of natural capital. Importantly, investors can seek to ensure that the companies producing the metals instrumental to the transition have established a roadmap for reducing their impact, notably in terms of GHG emissions and pollution.

We believe that the information provided in these pages is reliable, but it should not be considered exhaustive. We recommend that you inform yourself carefully before making an investment decision. Your attention is drawn to the fact that any forecast has its own limits and that consequently no commitment is taken by SYCOMORE ASSET MANAGEMENT as to the realization of these forecasts. This communication, of a promotional nature, has not been elaborated in accordance with the regulatory provisions aiming at promoting the independence of financial analyses. SYCOMORE ASSET MANAGEMENT is not subject to the prohibition to carry out transactions on the concerned instruments before the diffusion of this communication.

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