Authored by Global X ETFs
The fossil fuel heydays may be over sooner than we think as the world sets its sights on decarbonisation targets and renewable energy. Although coal prices jumped in 2022 due to the Russia-Ukraine war, there will be a structural decline in coal demand over the coming decade due to net-zero climate policies, limiting their operations and earnings potential.1
But when one door closes, another one opens, and the clean energy transition presents a compelling investment opportunity.
- Green Metals are Powering the Clean Energy Transition
Coal is the largest power-related carbon dioxide (CO2) polluter in the world, so to meet net-zero emissions by 2050 modelling from the International Energy Agency (IEA) suggests demand for coal will be slashed by 70%.2 Meanwhile, the IEA forecasts renewable energy will outpace coal as the world’s key source of electricity by 2025 and global capacity will increase 85% compared to the previous five-year period by 2027.3
This ambitious transition is backed by policies – including the 2015 Paris Agreement – which are forcing governments and businesses alike to accelerate the development of renewable energy infrastructure and technology.
Green metals such as lithium, copper, nickel, cobalt and rare earths are required to facilitate this shift because they are heavily used in an array of renewables from solar and wind power to hydrogen, nuclear and battery technology. In response, demand for green metals will at least quadruple by 2040.4
2. Supply Crunches to Drive the Price of Green Metals
Green metal supply may not keep up with increasing demand which should see prices and mining company revenues in the space rise. So, why is this shortage likely to happen?
The development of new mines is often risky and capital intensive, which prevents adequate supply from coming online in time to meet demand. For example, it can take between four to twelve years to open a copper mine with a price tag of around $1 billion.5
This effect was seen in recent years when the underlying price of lithium alongside the share price of lithium producers skyrocketed as supply failed to meet demand for the growing battery technology and electric vehicle (EV) industry.
A similar phenomenon is expected across a range of green metals in the medium to longer term – creating significant tailwinds from an investment standpoint. As shown in the below chart, the IEA predicts joint revenue from energy transition minerals will overtake those from coal before 2040.6
3. Adding Green Metals to a Portfolio
Given there are several green metals which should experience growth in the coming years, it could be difficult to identify individual stocks which will capitalise of this success. ETFs which basket up a range of companies involved in green metals can be an effective way to gain exposure to the wider investment opportunity. By implementing strict rules around revenue purity from mining or producing green metals as well as market capitalisation and liquidity requirements, ETFs allow investors to capture the clean energy megatrend in a cost-effective, diversified vehicle. It is important to always consider your risk profile before making an investment and noting the potential impacts of external factors – such as geopolitical, commodity price fluctuation and economic conditions – which may affect results.
Investors could use a green metal ETF to:
- Gain exposure to the clean energy transition which stands to be an inevitable and powerful megatrend around the globe over the medium to longer term.
- To diversify mining exposures both geographically and between commodities.
- As a barbell strategy to balance existing fossil fuel holdings.
- To add an environmental, future-focused tilt to a portfolio.
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