TOKYO -- Rising environmental awareness and the global shift to eco-friendly cars and energy sources are raising a question in the market for key metals used in such "green" sectors: Will there be enough supply?
In just the past month, the global mood surrounding the tackling of climate change has changed significantly. In late-October, China said it was planning to phase out traditional combustion engine cars and make all new ones sold in 2035 eco-friendly in the form of electric and plug-in hybrid versions.
Joe Biden's victory in the U.S. presidential election could bring a huge change to environmental policy in the world's biggest economy after President Donald Trump withdrew from the Paris climate agreement. Before the Nov. 3 contest, Biden had pledged a $2 trillion clean energy plan.
Japan and South Korea, meanwhile, have promised to reduce overall greenhouse gas emissions to zero by 2050.
In achieving such goals, metals that support "green" technology will be indispensable.
Take copper, for example. The metal, widely used for electric cables, will be indispensable for electric vehicles and renewable energy generators such as solar panels. Electric vehicles are said to use around 90 kilograms of copper per unit compared to 15 kilograms for gas-fueled vehicles.
Nickel and cobalt are used for automobile batteries to make them safe and stable. Aluminum makes the weight of cars lighter for a longer driving range. And platinum works as a catalyst for fuel cell vehicles, promoting the chemical reaction of hydrogen and oxygen.
Market participants have high hopes for demand growth.
Masaru Shiomi, chief financial officer at Sumitomo Corp., which operates Madagascar's nickel mine, sees China's push for eco-friendly cars as "aggressive" and this trend will "fuel the speed of the electric cars market expansion." "The value of nickel won't stay the same but will be further rising," Shiomi added.
It is estimated that nickel consumption for automobile batteries will grow 10 times by 2030 to around 1 million tons compared to 2020 whereas copper consumption for automobiles will double in 2040 to 8.6 million tons from 2019.
Metal traders said that outlook has prompted concerned customers to reach out to them and ask for increased procurement to secure sufficient supplies.
Metals prices slumped after the so-called super cycle that ran from the latter part of the first decade of the 20th century into the early 2010s brought by a rapid increase in Chinese demand. During that time, few new mine development plans were initiated.
As a result, industry participants are concerned about a future supply shortfall. "We estimate copper will be in deficit in around 2024," said one trader. A nickel trader based in Japan is also worried, saying the metal is also expected to be in short supply in the mid-2020s.
And even if a new mine development is launched now, it would take at least five or six years for one to produce anything.
Fears of supply constrictions are not groundless. Many market participants expect new mine development to be limited in the foreseeable future, despite the expected demand growth.
"The mining environment is becoming more and more difficult," said Takakazu Uchida, CFO of Mitsui & Co. Mitsui has high exposure in iron, coal and copper. The percentage of pure metals contained in ores is becoming less and less, while promising mines are located in places where it's difficult to deliver large equipment.
"Ten years ago, ores contained approximately 2% pure metals, but now it's halved to 1%," laments one trader who asked to remain anonymous.
Rising environmental awareness in many metal producing countries has led to tighter regulations, which raises environmental mitigation costs for developers.
Country risks and growing resource nationalism are concerns as well. Indonesia, for example, in January banned exports of nickel ore to expand its domestic smelting industry.
There is also an increasing pressure on mine developers to take environmental measures in the Southeast Asian country. A nickel project, led by Indonesian and Chinese companies, has been unable to start operation as planned after it faced criticism for planning deep-sea tailing placement which pipes unwanted pulverized rock into the deep sea.
Cobalt, used in automobile batteries, faces particular country risk as 70% of the global supply is from the Democratic Republic of the Congo. The metal is one of the most expensive, going for around $16 per pound, or $35,300 per ton, as of mid-November, and is often associated with child labor in the mining process.
"People have been trying to remove the cobalt from the batteries in recent years, which is difficult because the cobalt is quite important in the battery because it helps stabilize the battery," said Gavin Montgomery, research director for Battery Raw Materials at Wood Mackenzie. He said that reducing the amount of metal while maintaining stability is "one of the big challenges" in the battery sector.
China, the world's dominant metals buyer, is trying to increase its influence in pricing in the market, challenging the current system of metals price making. Currently, benchmark prices for base metals are set in London. As part of that effort, the Shanghai International Energy Exchange on Nov.19 started trading monthly copper futures denominated in renminbi, the Chinese currency.
As of November, the benchmark price of copper and nickel rose 40% each from March to $6,982 and $15,892 per ton, respectively. The increase was largely due to a temporary supply delay because of the coronavirus pandemic and subsequent lockdowns, said Tatsufumi Okoshi, a commodity analyst at Nomura Securities. China's faster-than-expected recovery and growing hopes for a vaccine are other reasons.
Many industry observers see the current price level -- copper is at a two-year high and nickel at a one year high -- is not enough to lure new mine development.
"The prerequisite for new development is for the current price to be stable for the next few years," said one industry source who develops metal mines. But uncertainty over the market -- how long will the pandemic will last, for example -- worries investors and no one can be certain if the price will stay at the current level, the source said.
Despite possibly political tail winds, some industry observers are calling for calm and a wait-and-see approach on the stance of the incoming U.S. administration.
"The real question is how quickly these developments will be introduced and what the specifics of these policies will entail," said Eleni Joannides, a copper analyst and senior research manager at Wood Mackenzie, adding that how easily Biden will be able to push through his environmental agenda given that the Senate majority is likely to be held by Republicans in the U.S. for example.
Naohiro Niimura, a partner at commodities consultancy Market Risk Advisory, said market participants need to keep things in proportion as there are many "variables" in the metals market.
"We are not sure to what extent China's electric cars slogan will be realized," said Niimura, pointing out possible "repercussions" that could alter the trend. "We need an eye to calmly analyze the true demand that lies between ideals and reality."