There are simply not yet enough recoverable raw materials to decarbonize and electrify the global economy. For investors, this sets the stage for sustained rallies in copper, aluminum and nickel prices, among many others.
Goldman Sachs’s multi-asset solutions team, an advisory division within the firm’s wealth management operations, predicted this week that the global economy is set to move from a focus on fossil fuel scarcity toward shortages of key industrial metals.
In the case of copper, the team noted that photovoltaic energy production required between 11 and 40 times more copper than fossil-fuel generation. Wind power systems use six times the amount of copper, zinc and nickel as coal-fired electricity and 13 times more metals than natural-gas power.
That adds up to a lot of metals. Citi analyst Eric Lee estimates that an incremental 5.5 billion tonnes of metals for green energy will be required cumulatively between now and 2050 to reach net-zero emissions. For context, global copper production is currently just over 20 million tonnes annually.
Mr. Lee, in a research report this week, said he believes that copper prices, currently around US$9,400 per tonne or US$4.30 per pound, will have to average US$12,000 per tonne or US$5.44 per pound in the coming decade. Otherwise, there will not be sufficient financial incentive for the necessary mass recycling of available existing supplies.
Aluminum is on one hand a great material for decarbonization efforts because its light weight makes vehicles and machinery more energy-efficient. However, the production of aluminum is extremely energy-intensive, and the dominant energy used for the process is currently derived from fossil fuels. Like copper, Mr. Lee believes aluminum prices will have to rise significantly to incentivize recycling and more climate-friendly production methods.
The materials scarcity trend extends to select rare earth metals. Neodymium and praseodymium, for instance, are magnetic elements used to convert electrical energy into motion in electric vehicles.
James Litinsky is the chairman and CEO of MP Materials, a company that operates the Mountain Pass mine in California, which produces neodymium-praseodymium oxide. As the only rare earth mine in the United States, it generates 16 per cent of global rare earth production.
At BofA Securities’ Global Metals, Mining and Steel conference this week, Mr. Litinsky remarked that “to electrify all vehicles in the U.S., as much as three million Mountain Pass mines would be needed.”
The sheer scale of the decarbonization challenge makes it difficult to predict the exact course it will take. New technologies will be developed, and old technologies will be applied in new ways. It does seem, however, that the process will include a strong profit tailwind for mining companies in related materials sectors.
— Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: Why are real estate investment trusts such as Canadian Apartment Properties REIT (CAR-UN-T) down so much? Are rising interest rates the only reason? If so, we are in for a long, rough ride. Could you please comment on this?
Answer: It’s important to put CAP REIT’s drop in perspective. Yes, the units have tumbled about 22 per cent after hitting a record high in September. But even after the recent drop, they have still posted a total return – including distributions – of about 10.7 per cent on an annualized basis over the past five years. As a long-term owner of the units myself, I’m certainly not panicking.
Are rising interest rates the prime culprit here? Probably. REITs are typically slow-growing businesses that generate steady, bond-like cash flows. That makes them susceptible, like bonds, to rising rates. Unlike bonds, however, CAP REIT has ways to increase its cash flows and, in turn, raise its monthly distributions to unitholders. It can acquire additional properties, for example, or increase rents in its existing buildings.
Rent controls limit the size of annual increases for existing tenants, but when a new tenant moves in CAP REIT can hike the rent to market rates. With the COVID-19 pandemic easing, CAP REIT saw a 10.2-per-cent increase in rental rates on suite turnovers in the first quarter, up from a 3.4-per-cent lift in the same quarter a year earlier.
But rising interest rates aren’t the only headwind CAP REIT is facing. In its first-quarter results, the REIT said it was hit by higher utilities costs because of the cold winter weather and a significant jump in the cost of natural gas. It also faced rising property taxes and higher costs for weather-related maintenance.
These challenges aside, CAP REIT looks to be in solid shape. As of March 31,…