The energy transition currently underway globally may be one of the largest projects in human history, and it may rely heavily on industrial metals. This could create a compelling opportunity for institutional investors as economies shift from fossil fuel-derived energy to renewable energy sources powered by industrial metals. Almost every renewable energy system – including electric vehicles, wind turbines, solar panels, grid level batteries, and carbon capture systems – uses large amounts of industrial metals.
The European Union, U.S., and China have all committed to the energy transition. These nations combined represent about $51 trillion of global gross domestic product. When you consider that there are 191 additional countries committed to the Paris agreement,1 the scale of the energy transition can only be described as massive.2 Because energy is economically crucial to these countries, they are highly motivated to make the changes. This incredible transformation may increase industrial metal demand for years to come.
Here’s a look at the potential opportunity surrounding four key industrial metals: copper, aluminum, zinc, and nickel.
The case for copper
Copper plumbing components recovered from ancient Egyptian pyramids are still in serviceable condition today, more than 5,000 years later. The biggest copper producers in the modern world are Chile (28.4% of the world’s supply), Peru (12.1%), China (8.2%), Congo (6.3%), and the U.S. (6.2%).3
Copper is still a widely used industrial metal today because it is…
- A useful conductor of electricity
- Corrosion resistant
- Very ductile
- Biostatic (resistant to bacteria growth)
Copper can also be combined with other metals to make alloys, such as brass and bronze, which are even harder and stronger than pure copper.
Copper is most popularly used for electrical work – the building and construction industry represents its single-largest market. There are about 400 pounds of copper in the average American home in air-conditioning systems, food-processing surfaces, and doorknobs, among other uses.
Copper’s role in the energy transition
Electrification is a cornerstone of the energy transition. Since copper is so commonly used in electrical work, it follows that demand for copper may increase in the coming years.
One of the most prominent examples of electrification is taking place within the automobile industry. Electric vehicles (EVs) have become significantly more popular within the last decade, and it’s expected they may replace fossil fuel-hungry internal combustion engine (ICE) vehicles. The average EV holds about 200 pounds of copper – three to five times more than an ICE vehicle.4 There are currently 1.3 billion ICE vehicles globally. As EVs replace ICE vehicles, demand for copper may rise because. EVs and their chargers require more copper than ICE vehicles.
The transition of energy to lower-carbon sources should have a significant impact on future demand for copper. Solar panels and wind turbines, two popular alternatives to fossil fuel-driven energy, require a significant amount of copper. Solar panels contain about 5.5 tons of copper per megawatt produced, for example. And a single three-megawatt wind turbine can use as much as 4.7 tons of copper.5
Risks associated with copper
Copper supply has been stagnant for several years, as low prices have curtailed investment. During low-price periods, miners shift production to the sweet spots of higher-quality copper in mines, known as “high grading.” This leaves lower-quality reserves for periods when the price is higher. In addition, mine production is almost impossible to increase quickly – and sizable new mines are hard to find, no matter how much demand increases. The CEO of Freeport-McMoRan, the largest publicly traded copper producer, has stated that if copper prices doubled tomorrow the company would be unable to bring on new supply within five years.6
The case for aluminum
Aluminum is the most abundant metallic element in Earth’s crust. The primary method of aluminum production, electrolytic reduction, was discovered nearly 140 years ago and is still the primary method used today. China (55.4%) is by far the world’s leading aluminum producer. Other major producers include Russia (5.8%), India (5.8%), Canada (4.5%), and the United Arab Emirates (4.1%).7
Aluminum is useful in several industries and applications because it…
- Is lightweight (it weighs less than a third as much as steel)
- Has a high strength-to-weight ratio
- Has high heat conductivity and a low specific heat capacity (it cools quickly)
- Can effectively resist salt-water corrosion
Aluminum’s strength and weight lend themselves to the construction of aircraft, railroad cars, and automobiles. Its high heat conductivity and the fact that it quickly cools make aluminum popular in cooking utensils and ICE vehicle pistons. Aluminum foil, siding, and storm windows are excellent insulators for these same reasons. It can also be used in low-temperature nuclear reactors. Because aluminum can stand up to salt water, it’s often used in boat hulls and other marine devices. The National Aeronautics and Space Administration will even use aluminum to build its next spacecraft.
Aluminum is the most energy-intensive of the industrial metals – it takes a lot of energy to turn raw ore into everyday aluminum. However, 75% of all aluminum ever produced is still in use because it’s cheap and easy to recycle. Recycling aluminum saves more than 90% of the energy required to make new aluminum. In fact, aluminum cans contain three times as much recycled content as glass or plastic.
Aluminum’s role in the energy transition
Like copper, aluminum plays a key role in automobile energy efficiency. For example, its light weight helps increase vehicle fuel economy. Furthermore, in 2009, the use of aluminum in vehicles offset more than 90% of greenhouse gas emissions associated with aluminum production in North America. In fact, using aluminum in cars saves 44 million tons of carbon dioxide emissions. Aluminum is even more crucial for EV production as it offsets chassis weight from relatively heavy batteries and improves range. Among several battery technologies currently in testing, one is an aluminum-air battery.8
Coated aluminum roofs reflect up to 95% of sunlight, making it more efficient and less carbon-intensive to cool homes and buildings. In commercial spaces, energy efficiency is a key qualifier for Leadership in Energy and Environmental Design (LEED) certification, a standard for which many environmentally conscious corporations reach.9
Risks associated with aluminum
Aluminum use has increased in the past few decades, and demand is expected to remain high. For only the second time in history, however, supply will be purposely constrained. The first time was in 1994, after the fall of the Soviet Union, when producers agreed to restrict output (recall that Russia is home to the world’s second-largest supply of aluminum).
Now, China is capping aluminum production to meet its goal to be carbon neutral by 2050. If aluminum producers were required to pay $50 per ton of carbon via carbon credits, it would raise the cost of aluminum by 50%. On top of this, Russia has put in place a 15% export tax from August to December 2021.
The case for zinc
Zinc is the 24th most abundant element in Earth’s crust, and is never found in its pure state. Rather, zinc is found in compounds such as zinc oxide and zinc silicate, among others. It’s also in minerals, such as zincite, hemimorphite, and smithsonite. Zinc is used as a protective coating for other metals, such as iron and steel, in a process known as galvanizing – and can be combined with copper as an alloy to make brass. It can also be made into an alloy with aluminum and magnesium. Major producers are China (33.1%), Peru (11.0%), Australia (10.5%), the U.S., (5.9%) and India (5.8%).10
Zinc’s role in the energy transition
Zinc is used in energy storage systems for its qualities of recyclability, safety, low cost, and zero emissions. These include uses in several battery chemistries used in electronics, industrial, marine, aeronautic, and remote power supply applications.
The manufacturing process for wind turbines and solar panels includes zinc-reliant galvanized steel, which is also used in fuel cells, cars, fences, guard rails, tubing, and light poles.
People all over the world also need zinc in their diets. It is a crucial micronutrient for higher crop yields, but zinc deficiency exists in more than 50% of the world’s soils. More than 2 billion people worldwide do not get enough zinc in their diets, and more than 800,000 indirectly die from zinc deficiency.
Zinc also contributes to sustainability as 30% of the metal is composed from recycled or secondary zinc, and zinc extends the lifecycle of steel to as much as 170 years with hot dipped galvanizing.11
Risks associated with zinc
While zinc is useful in pigments, batteries, and chemicals, there are substitutes available to use in place of galvanized steel in some applications. For example, aluminum, steel, and plastics can sometimes substitute for galvanized sheets.
The case for nickel
Nickel is a hard, malleable, ductile metal primarily used in the production of stainless steel and other corrosion-resistant alloys. It’s also used in coins to replace silver, as well as in rechargeable batteries and electronic circuitry. Constructing turbine blades, helicopter rotors, extrusion dyes, and rolled steel strip all involve nickel-plating techniques, such as electroless coating or single-slurry coating. Major producers are Indonesia (32.7%), the Philippines (12.4%), Russia (10.7%), and New Caledonia (8.0%).12
Nickel’s role in the energy transition
Nickel is a component of stainless steel, which in turn has everyday uses in food-preparation environments, healthcare, and easy-to-clean appliances. But nickel is also useful in power-generation and pollution control, as well as chemical and pharmaceutical production. These industries may gain traction and experience change during the energy transition.
One U.S. Department of Energy study notes that U.S. electricity demand could increase 38% if all sectors of the economy are electrified by 2050.13 Nickel is also used in batteries used for grid-level storage. Currently, 23.2 gigawatts of grid-level battery storage exists in the U.S., compared to 1,100 gigawatts of generating capacity. Clearly, many more batteries are needed to support wind and solar generators, with knock-on effects for nickel demand.
Risks associated with nickel
Ongoing battery technology research could change battery technology and the required ingredients for batteries, nickel among them. Of late, research has focused on removing or reducing the amount of cobalt in batteries due to energy security issues and difficult artisanal mining conditions in the Democratic Republic of the Congo. These issues do not exist for nickel, however, removing the motivation to engineer nickel out of the supply chain.
The big picture
Copper, aluminum, zinc, and nickel all play all play an important role in the impending energy transition – and as such, a potential compelling investment opportunity.
However, as with any types of investments, there are associated risks. In this case, such potential risks include extremely high oil prices and political fighting over necessary related infrastructure projects in the U.S. (think electricity-generation and the implementation of electric charging networks). In both cases, it is believed the likelihood of these two risks becoming reality is fairly low.
While keeping these risks in mind is important, there is evidence that countries agree that metals demand may be higher and more critical to their economic wellbeing. The U.S. Secretary of Energy released “The National Blueprint for Batteries,”14 which focuses on battery materials’ supply-chain security. The EU formed the “European Raw Materials Alliance,”15 which also focuses on domestic renewable energy materials’ supply-chain security. China has been buying up battery raw material mines for at least a decade, and more than 80% of processed cobalt, 100% of spherical graphite, and 51% of lithium already come from China.16
Much of the technology and infrastructure that the transition to a more sustainable world requires depends upon industrial metals. As more and more nations get serious about their commitments to lower carbon emissions and cleaner energy, the need for these metals is expected to continue to grow.
Learn more about adding commodities to a diversified portfolio.
1 Paris Agreement - is an international treaty on climate change, adopted in 2015
2 US Geological Survey, 2021
3 US Geological Survey, 2021
4 Copper Development Association, Inc., Electric Vehicles Infographic,” 2021
5 Copper Development Association, Inc., “Renewables,” 2021
6 Bloomberg, “Freeport’s Adkerson Sees Copper Scarcity Trumping Cooling Effort,” May 27, 2021
7 US Geological Survey, 2021
8 The Aluminum Association, “Aluminum use,” 2021
9 Ibid
10 US Geological Survey, 2021
11 International Zinc Association, “Zinc: A sustainable material essential for modern life,” 2015
12 US Geological Survey, 2021
13 National Renewable Energy Laboratory, “Electrification Futures Study: Scenarios of Electric Technology Adoption and Power Consumption for the United States,” 2018
14 National blueprint for batteries, 2021
15 European Raw Materials Alliance, 2021
16 Foreign Policy Research Institute, “Beyond Oil: Lithium-ion battery minerals and energy security,” March 3, 2021
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The Bloomberg Industrial Metals Subindex (BCOMIN) consists of 4 commodities which are weighted 2/3 by trading volume and 1/3 world production with an additional criteria of global economic significance. Weight caps are also applied to limit concentration in a particular sector (33%).
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ETF001796 11/19/22
US-191121-161310-1