By Emily Holbrook
While the move to a greener future may seem like a positive progression, it will require considerably more metals and minerals than are currently available. Events like the passing of the U.S. Inflation Reduction Act will result in the amount of raw materials required for such a transition to soar 500% by 2050, according to The World Bank. Analysts at BloombergNEF estimate that the path to net zero may require digging up 5.2 billion metric tons of metals through 2050, which may be worth as much as $10 trillion.
Demand like this represents both a lucrative investment opportunity and an ever-evolving business risk for Canadian pension plans.
Rising Demand & Market Trends
Electric vehicle batteries, wind turbines and solar panels require rare earth metals and/or minerals in the manufacturing process. As research has put forth that limiting warming to 1.5 degrees Celsius depends on CO2 emissions reaching net zero between 2050 and 2060, companies across all industries are investing in renewable energy, much of which relies heavily on the following metals, among others:
Lithium: The increasing demand for electric vehicles (EVs) and energy storage systems drives the demand for lithium-ion batteries. This trend is expected to continue as the world transitions toward sustainable energy solutions. The global lithium supply is concentrated in a few countries, some of which pose geopolitical risks.
Copper: Copper is a vital component in infrastructure development, renewable energy systems and electrical wiring. Growing demand for green technologies, including wind and solar power, will drive copper consumption. According to the Copper Development Association, a 3-megawatt wind turbine can contain up to 4.7 tons of copper. Chile, Peru, the Democratic Republic of Congo and China provide the vast majority of the global copper supply.
Nickel: The demand for nickel is anticipated to surge due to its role in battery technologies. Nickel-rich batteries, such as those used in EVs, provide enhanced performance and longer lifespans. Canada is rich in nickel deposits, but the majority of global supply comes from Indonesia, the Philippines and Russia. Diversifying the supply chain for nickel is becoming more important due to geopolitical tensions and supply disruptions within supplying countries.
Volatility, Regulations & Other Risks
While including raw materials and minerals in investment portfolios can enhance diversification, it comes with significant risks. The below are the most common.
Price Volatility: Raw materials and minerals, including lithium, copper and nickel, are subject to price volatility driven by global supply and demand dynamics, economic conditions and geopolitical factors. Sudden price fluctuations can impact the value of investments.
“If you’re going to invest in something that has this high level of volatility, one really needs to go up the ladder in terms of quality of companies and quality of underwriting,” said Greg Sharenow, managing director, asset allocation portfolio manager with PIMCO.
Regulatory and Environmental Risks: The extraction and processing of raw materials and minerals are subject to environmental regulations and scrutiny. Changes in regulations or increased environmental standards may lead to additional compliance costs or operational restrictions, affecting profitability.
“The mining, transportation, fabrication and manufacturing of all the renewable energy technologies are incredibly energy intensive,” says Sharenow.
Geopolitical and Supply Chain Risks: Raw materials and minerals often come from geographically concentrated areas, making supply chains vulnerable to geopolitical tensions, trade disputes and supply disruptions. Changes in trade policies or the emergence of new market players can impact supply availability and prices.
As Jason Bordoff and Meghan L. O’Sullivan wrote in a recent issue of Foreign Affairs, “The world’s largest supplier of lithium (Australia) accounts for around 50% of global supply, and the leading suppliers of cobalt (the Democratic Republic of the Congo) and rare earths (China) each account for around 70% of those resources.”
In contrast, they note, production of crude oil is more balanced, with the United States, Saudi Arabia and Russia each accounting for 10% to 15% of global supply. “The processing and refining of these minerals are even more concentrated, with China currently performing around 60 to 90% of it,” they note. “Meanwhile, Chinese companies manufacture more than three-quarters of electric vehicle batteries and a similar proportion of the so-called wafers and cells used in solar energy technology.”
Technological Advancements: Technological advancements in battery technologies, energy storage and alternative materials could pose risks to specific raw materials and minerals. For example, the development of alternative battery chemistries may reduce the future demand for lithium or nickel.
“We’ve tended to see that if prices rise in anticipation, it oftentimes has a negative impact on forward demand,” says Sharenow. “A prime example is battery manufacturing, where extremely high lithium prices are going to lead to alternate battery chemistries — and these alternative batteries being created at a time when you’re making a multi-year investment in the supply side based on a demand outlook that may not be changing.
“It’s very complex to invest in markets like that, particularly when the volatility of them are so incredibly high,” he adds. “When things like that happen, one has to then make, at the very least, a gut check about whether or not we want to bet against innovators and engineers and technologists to solve for those imbalances.”
Operational Risks: Mining and processing raw materials and minerals involve operational risks, including accidents, labor disputes and project delays. These risks can impact production levels, costs and profitability.
Social and Stakeholder Risks: The mining industry faces social and stakeholder risks related to community relations, indigenous rights and human rights issues. Failure to address these concerns can lead to reputational damage and operational disruptions.
Currency and Exchange Rate Risks: Investments in raw materials and minerals involve exposure to currency fluctuations, especially if investments are made in foreign markets. Exchange rate movements can impact investment returns when funds are repatriated.
Considering the rising demand for lithium, copper, nickel and other raw materials and minerals, investing in these resources can present attractive opportunities for Canadian pension plans. Incorporating these resources into investment portfolios can enhance diversification and align with long-term sustainability goals. Evaluating the myriad risks, however, is crucial in making informed investment decisions.
The Ontario Teachers’ Pension Plan and Canada Pension Plan declined to comment for this article.
Emily Holbrook serves as owner and head content creator at Red Label Writing LLC, a content studio that collaborates primarily with the insurance and financial services sectors.
