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Decarbonisation will boost commodities

decarbonisation commodity

Commodity prices are set to swing up out of a long downward cycle, driven by decarbonisation and a greater need for resources to create cleaner energy.

Commodity investments will benefit from decarbonisation activities resulting in a rise from the bottom of the valuation cycle where they are currently placed, an Australian investment manager has predicted.

Perpetual investment solutions director James Holt said the pricing of commodities was moving through a large cycle similar to the pricing booms of the 1970s and early 2000s and on a 10-year basis were starting to increase in value again as governments and industries moved from fossil fuels to cleaner energy sources.

“Whether you agree with it or not, we are heading down the path of decarbonisation,” Holt told attendees at the recent Australian Shareholders’ Association conference held in Sydney.

“This will take decades to achieve and I’ve seen numbers tossed around for the cost being $40 trillion, $60 trillion, $100 trillion. I have no idea, but it will be a big number either way.

“The cost varies depending on how far you think we need to go, but how many commodities have to go into an electric vehicle compared to a conventional car?”

He added the commodities of copper, lithium, nickel, manganese, cobalt, zinc and rare earths are used more intensively in the production of electric vehicles compared to conventional cars.

“We have around one-and-a-half billion cars today, but will have 2 to 3 billion in years to come so that involves a tremendous amount of consumption of those commodities,” he said.

He pointed out the same would apply in the development of clean energy technologies compared to current energy technologies.

“Natural gas and coal are pretty simple as they consume copper and nickel, but in the future everything – copper, cobalt, nickel, zinc, rare earths – all these commodities are going to be consumed in far greater quantities whether you use nuclear, solar, onshore or offshore wind,” he said.

“The consumption of commodities per megawatt hour of power produced is going to be much higher and will drive the demand for resources as time goes on.”

According to Holt an ongoing shift in the development of ‘downstream assets’ would also continue to boost the price of commodities.

“If you look around the world, China doesn’t necessarily dig up a lot of these commodities, it digs up rare earths, but not much cobalt, lithium, copper or nickel,” he noted.

“We dig up a lot of those, but China processes massive amounts of the vast bulk of rare earths, the majority of cobalt and lithium and large chunks of copper and nickel as well.

“So with COVID and the realisation about how risky our supply chains are comes a drive to bring the refinery production of these commodities onshore, which we think will continue to happen at pace as time goes on.”

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