Whatever your views are on ‘net-zero’ policies, our job as commodity market investors is to assess the risks and opportunities of any investment, irrespective of our own political or ideological perspectives.
It’s with that introduction that I believe we are close to getting a signal as to how governments will look to temper demand for the metals essential for a net-zero energy transition – copper, lithium, nickel, cobalt, etc.
A fast transition to electric vehicles will of course require enormous amounts of these metals, and given the bottlenecks to production, the impact on prices may be so strong that this acts to dramatically slow the speed at which the net-zero energy transition takes place.
A recent report by the IMF examined a range of scenarios necessary to meet net-zero by 2050 given current supply side elasticities. For example, it can take several years or up to two decades to bring on new mine supply depending on where it is located and the technical and economic challenges involved.
Given the need to frontload the demand impact in order to meet the targets, the analysis found that metal prices are likely to increase by several hundred percent, and remain there for a significant period if supply is to be sufficiently incentivised.
The IMF highlight the potential impact that these bottlenecks might present to government ambitions: “The high uncertainty surrounding demand scenarios is an important caveat. Technological change is hard to predict, and the speed and direction of the energy transition depends on the evolution of policy decisions. Such ambiguity is detrimental because it may hinder mining investment and raise the odds that high metal prices derail or delay the energy transition.”
Governments are in a position to reduce this ambiguity by acting on demand.
It’s with that introduction that this week, the UK’s Transport minister, Trudy Harrison said that the country needs to move away from its “20th-century thinking centred around private vehicle ownership”. The pretext of her comments that such a policy would help to reduce carbon emissions and congestion, and may also deliver health and wellbeing benefits.
However, a policy of restricting, or even banning the private ownership of vehicles would clearly have huge implications for electric vehicle metal demand. Demand forecasts based on each of us owning our own electric vehicle in the future would have to be torn up. Less demand from EV’s would mean more could be made available to accelerate the rollout of renewable energy.
Private ownership of cars is of course highly political. Individuals understandably push back on constraints on their personal freedom, especially when there are no adequate alternatives. Public transport is mostly fine in densely populated urban areas, but is lacking elsewhere. Autonomous vehicles? Well, maybe, but not yet.
I think this could be the first of many ‘signals’ by government of the direction their citizens will be required to make in the coming decade. Something to keep an eye out for elsewhere in the world.
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