By Simon Morris, Wood Mackenzie Head of Metals
Is there going to be a supercycle? We think so, but I’m pretty sure it will be different from any of the others we’ve seen before.
First off, this will be the first commodities supercycle in history where hydrocarbons aren’t fuelling the boom. That’s not to say that oil, gas, and coal won’t play an important role in the energy mix; the global economy will rely on them for years to come. Instead, this time, it will be the metals critical to the energy transition that will electrify the markets.
Secondly, uniquely the upcoming period of supercharged growth has been clearly signposted well in advance. With such forewarning, the mining sector now has the opportunity to act pre-emptively to achieve a more sustainable long-run market dynamic. To not act now will leave the sector at risk of yet another post-boom hangover as the cycles that have plagued the sector since time immemorial play out again.
Fossil fuels to lose out
What is our justification for supporting a supercycle narrative? Well, fundamentally, Wood Mackenzie believes that US$50 trillion of investment will be needed over the next three decades to achieve a 1.5˚C global warming trajectory. This will electrify societies’ infrastructure and engineer out the aspects of economic activity that most significantly contribute to carbon emissions. Metals supply will play a vital role in achieving this.
But as our latest research highlights, there will be winners and losers as a result of this supercycle. In our proprietary Accelerated Energy Transition-2 (AET-2) scenario, which is consistent with limiting the rise in global temperatures since pre-industrial times to 2 °C, fossil fuels’ share of energy demand falls to 50% by 2050 as low-carbon energy captures market share.
Under this scenario, rapid and aggressive electric vehicle penetration would lead oil demand to collapse to 35 million b/d ‒ 70% below today’s levels ‒ and see the oil price slump to below US$20/bbl. Thermal coal demand would also enter a steep decline. Gas demand, in contrast, would remain resilient due to opportunities from the large-scale development of carbon capture and storage and carbon capture, utilisation and storage in the industrial and power sectors, as well as the deployment of blue hydrogen.
Clearly oil, gas, and coal demand will not vanish in a puff of carbon-laden smoke; they will be around for decades and exposed to cycles and price swings as before. But the energy transition results in only one outcome for fossil fuels: demand destruction. It’s just a question of when.
Energy transition metals in the spotlight
The winners will be the industrial metals needed to electrify society – cobalt, lithium, copper, nickel, and aluminium, among others. The dizzying levels of additional metal that will feed the energy transition over the next 20 years – 360 million tonnes (Mt) of aluminium, 90 Mt of copper and 30 Mt of nickel under our AET-2 scenario – present obvious challenges for producers and consumers alike.
The additional metal supply needed by 2030 under our base-case and AET-2 scenarios
But those with a vested interest in metals are already enthusiastic cheerleaders for this intoxicating narrative about the energy transition and the quantum of metal that will be needed to achieve it. I feel that, in among this excitement, it is as important to reflect on the risks that a supercycle built around decarbonisation will pose for the sector.
With electric vehicles emerging as a critical source of demand growth, metals producers are going to have to learn how they supply and interact with a new type of metals consumer – one with an acute focus on price and supply predictability. Not adapting could see some metals innovated out of value chains and launched into obscurity.
Additionally, as we saw with the increasing rejection of plastic usage, a greater focus on sustainability could see society react against the very considerable rise in the use of primary (i.e. non-recycled) metals used in cars, mobile phones, telecoms, and infrastructure. Either buying less or demanding greater re-use presents a considerable downside risk for the producers of tomorrow.
Finally, while China’s move to secure battery raw materials is well documented, less well-known is its increasing self-sufficiency extending downstream. 75% of global lithium-ion batteries, 70% of all solar panels and 60% of electric vehicles are made in China.
As this concentration of control grows, the role of non-Chinese participants in these supply chains is one of the most important questions that will need to be answered as this transition unfolds. Those who choose to participate too late in the cycle – be they nations seeking to secure supply for themselves, customers wanting to protect their production lines, or investors wanting to cash in on supernormal profits – are likely to find that they either can’t afford to participate or are precluded from the supercycle altogether.