This is sponsored content from Citywire in association with Federated Hermes Limited.
When investors consider metals exposure in their portfolios, they might once have focused on gold, silver and platinum. Today, more common metals are becoming increasingly important because they will play a vital role in the energy transition.
Demand for copper, for example, is growing due to the electrification of transport, industry and heating. According to the International Energy Agency, record deployment of clean energy technologies is propelling demand for copper.1
But limited copper production means a supply and demand gap is opening in the market, which will widen dramatically over the coming years as demand grows and supply stagnates.
‘Electrification is projected to increase annual copper demand to 36.6 million metric tons by 2031, while current supply projections indicate a shortfall of about 20% from that figure’, 2 said Olivia Lankester, Director of Responsible Investing and Sustainability at Federated Hermes Global Emerging Markets Equity.
‘We believe the world’s economy is becoming increasingly copper intensive as countries around the world take steps to decarbonise power generation, transport and industry. We do not see sufficient new copper production capacity coming on stream to meet this increased demand in the second half of this decade. Copper prices will likely need to settle at a higher level to incentivise these new mines to be built. Higher copper prices not only benefit copper miners, but also equipment suppliers and countries which have huge copper mining industries, like Chile,’ said Christopher Clube, Senior Analyst at Federated Hermes.
‘We believe the world’s economy is becoming increasingly copper intensive as countries around the world take steps to decarbonise power generation, transport and industry.
Aluminium is also finding new uses in the transition to net zero. This lightweight metal is widely used in electric vehicle production, helping to give better efficiency and allowing vehicles to achieve superior range. Aluminium is also being used in solar generation and in vital electricity transmission infrastructure. Moreover, supply seems likely to be constrained in the second half of the decade because China has capped its own aluminium production as part of its own decarbonisation process.
But there’s a problem with aluminium: although it’s a critical material for achieving net zero, its production is still notoriously ‘dirty’. Turning alumina into aluminium is a highly energy intensive process. More than 70% of the energy used in the process comes from fossil fuels.3
This means the aluminium manufacturing sector is a significant source of CO2, emitting about 2% of all man-made CO2 emissions.3
To achieve an emissions pathway on track for a Paris Agreement target of 1.5C of global warming, the aluminium industry will need to make dramatic cuts in emissions: from about 15.9 metric tons of carbon dioxide per metric ton of aluminium today, to less than 0.5 tons of CO2 by 2050, according to the International Aluminium Institute.4
This is likely to create dispersion within the sector: going forward, the market will increasingly distinguish between aluminium producers using traditional carbon-intensive methods and their greener counterparts.
Looking at the overall aluminium industry, more than 50% produces aluminium using coal-fired electricity plants, roughly 25% from gas-fired electricity plants and only 25% using renewable electricity.5
One example of a lower-carbon aluminium producer is Malaysia’s Press Metal, which uses hydropower as its electricity source rather than fossil fuels. This means that the potential carbon savings from Press Metal versus its coal-powered peers are in the region of 75%.
To illustrate the impact for end users: the aluminium in a North American vehicle would typically account for about 0.9 tonnes of carbon emissions, if made with aluminium from Press Metal. This compares with about 3.45 tonnes of carbon emissions from a coal-fired manufacturer.
The company has set a net zero by 2050 target and is preparing for Aluminium Sustainability Institute (ASI) Chain of Custody certification, to demonstrate its commitment across its product lifecycle.
Despite all this, though, the company still faces structural constraints. In particular, the raw materials supply chain for its alumina is currently dependent on coal: it has two joint venture associate companies, which supply 60-80% of its alumina and both use coal in their processes.
This is an example of how engagement and monitoring from investors are vital to achieving sustainable outcomes. Federated Hermes’ team expect Press Metal to seek to influence its joint venture partners.
Furthermore, the fact that it is working on ASI Chain of Custody certification, covering its whole supply chain, is a clear signal that the company takes this issue seriously. ASI certification validates the sustainability credentials of the whole supply chain, including alignment with the Science Based Targets initiative expectations.
The Federated Hermes team continues to engage and monitor progress.
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