Away from supply-shortage headlines, the energy transition has begun

Right now, the supply of physical goods continues to be strained and every major economy is experiencing problems transporting goods.
Robert Minter
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There has never been an economic disruption on the scale of the Covid pandemic. The ‘electronic’ world has handled the shutdown and re-opening well, while the ‘physical’ world has not. Right now, the supply of physical goods continues to be strained and every major economy is experiencing problems transporting goods. Meanwhile, government income-replacement programmes have stimulated demand.

These conditions have created dramatic returns on lesser-known commodities and goods that usually don’t attract the headlines, such as lumber and used cars. However, these shortages and bottlenecks have distracted from themes we all know are underway and have created attractive pricing on the commodities that are tied to the green energy transition. Looking at some of the price levels, you would be forgiven for thinking that the transition to renewable energy had already occurred. However, there are 1.3 billion internal combustion engines (ICE) autos on the earth and 10 million electric vehicles (EVs), so EVs as a percentage of the total auto fleet are only 0.7%. Statistically speaking, the green transition has not even started yet.

Every EV has three to five times the copper content of a traditional vehicle – with EVs averaging nearly 200 pounds per vehicle. Copper is also crucial for the home and public chargers that will power electric vehicles. It’s in electricity generators and the very transmission lines that deliver the electricity. A single 3 megawatt wind turbine can contain up to 4.7 tons of copper. Solar panels can use 5.5 tons of copper per megawatt of generating capacity. Grid storage batteries, necessary when using interruptible generation sources like wind and solar, use up to 4 tons of copper per megawatt.

Copper mine production is not easy to increase. The average copper mine takes between five and ten years to bring online – there is at least one mine, begun in 2011, that still hasn’t been brought into production. Richard Adkerson, CEO of copper industry leader, Freeport McMoRan, stated last month that even if copper prices were to double overnight, he wouldn’t be able to increase mine production for at least five years.

Aluminium is another essential commodity for the green transition. It requires a tremendous amount of energy to produce it, which creates two dynamics. First of all, it is one of the few materials that’s profitable to recycle – up to 75% of all aluminium produced is still in use. The second dynamic is that China, which produces 56% of all the world’s aluminium, has currently capped production in order to lower the country’s energy use and carbon footprint. So, the material will need to be produced in other countries where energy is more expensive. This is sure to drive up the production cost. Aluminium is crucial for the energy transition because it makes ICE vehicles lighter and more fuel-efficient; it also helps EVs offset the weight of battery packs. At the Tesla 2020 battery day, the company explained that a one-piece aluminium chassis that integrates batteries into the frame was going to be the basis of their unique selling proposition in the future.

The metals zinc and nickel are less talked about, but they also have interesting qualities. Zinc is used to galvanize steel and can extend its life to 170 years. It is also used in pigments, batteries, and chemicals. Nickel is used to make the stainless steel required for food preparation, healthcare, and some batteries.

The energy transition is one of the largest and most expensive projects humans have ever attempted. Over the coming years, a substantial portion of the world’s GDP will be used to shift energy production from fossil fuels to industrial metals and battery materials. Unless you’re a carpenter, don’t be distracted by lumber prices, invest in what you believe the future will look like.

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Away from supply-shortage headlines, the energy transition has begun