Commodities that will rule the green, digital transition

A new report by Fitch Solutions forecasts that some ‘conventional’ commodities will receive an added boost in the next 20 years as they take a central stage in the green and digital transitions. 

Among these commodities are copper, nickel, tin, aluminium and rare earths which, together with lithium and cobalt, are expected to see a demand boom on a multi-decade horizon amid the battery revolution.

“While the mining and refining sectors for ‘traditional’ base metals such as copper, nickel, tin and aluminium are well established, we note that the lithium and cobalt mining sectors will develop quickly in the coming years and these markets will mature,” the report states. 

Some materials, however, are more at risk than others of a fall in demand, Fitch points out. 

In the market analyst’s view, extensive research and development to improve the efficiency, cost and sustainability of batteries will lead to fast-moving developments in the types of battery chemistries, with cobalt hanging by a thread as many players along the battery supply chain are aiming to reduce or entirely phase out cobalt from batteries given the elevated sustainability/ESG risk associated with the commodity.

According to Fitch, in addition to the ESG issues surrounding cobalt production, the metal — together with rare earth elements — may also experience supply vulnerabilities either due to a concentration in production in geopolitical hotspots or to sustainability issues.

The review also foresees a bright demand outlook for metal scrap as recycling and the use of steel electric arc furnaces (EAFs), which require scrap, rise significantly over the 10-year horizon.

Fitch’s report says steel and iron ore demand — and therefore zinc demand — is likely to slow over the years and to record the most subdued growth among metals. Reduced consumption would be caused by China recording more lacklustre growth, and by a rise in efficiency in the steel sector.

Demand for high-quality and green steel, on the other hand, is expected to be much stronger amid the likely multiplication of decarbonization policies on a 10-to-20-year horizon. 

Digitalization and modernization initiatives in the infrastructure sector such as China’s ‘New Infrastructure’ plan, along with decarbonization of the manufacturing sector, are likely to require high-quality, lighter and lower carbon steel. This means that demand for steel scrap will also be strong out to 2030 as the less polluting EAF’s capacity will rise significantly.

In addition, the report states, “the ‘hydrogen as a commodity’ story has just started to unfold.” 

Fitch expects green hydrogen production, which comes from renewable sources, will rise from less than 1% of the current global market supply to 10% by 2030. This, however, will be at the expense of traditional fossil fuel-based or grey hydrogen.

The report points out that green hydrogen’s rapid acceleration has been brought forward by declining renewable costs, wide geographical scope, short development times and its zero-carbon footprint.

In contrast, the firm expects natural gas-based or blue hydrogen production growth to remain highly focused in several key markets and to be slower to gain market share owing to long development times, resource dependency and high levels of capital investment.

“Overall, we expect that all types of low-carbon hydrogen will most likely grow in the coming years as the energy sector accelerates its transition towards lower emissions,” the document states. “As demand and production capacity for this energy grows robustly in the coming years, the market will mature and require transparent pricing benchmarks, market liquidity and efficient risk management tools for suppliers and consumers in order for adoption to really pick up.”

Fitch believes that hydrogen product demand will be most concentrated in large, highly-developed markets such as the United States, China, Western Europe and Canada, where the focus will be on green hydrogen. 

In the commodities sector, green hydrogen is expected to not only power operations and reduce emissions but also create opportunities as a new revenue stream for energy, mining and metal players. 

The review highlights the cases of major oil and gas companies such as Equinor, Shell, Total, Repsol, ENI and BP, which are already driving support for low-carbon hydrogen, in particular blue hydrogen, while in the mining realm Posco and Fortescue Metals have recently announced their goal to be major producers and suppliers in the market.

Although carbon credits are not a commodity in the traditional sense, Fitch’s report treats them as such because they have some similarities with commodities markets. 

As carbon trading mechanisms multiply amidst accelerated decarbonization strategies by both states and corporations, the forecast is that they will become a booming market. 

The EU is seen as the leader of such growth as its revised Emission Trading Schemes Directive, phase 4 will apply over 2021-2030 and should imply a decline at a faster rate than in recent years in the number of allowances available, as well as a tightening on industry leakage with increased sector coverage.

“This has already had a large impact on the power sector and will continue to be a core driver of the energy transition in the region,” the report states. “We, therefore, expect the EU ETS market is actually likely to see a sharp increase in EUA trading volumes and prices as existing and new industries compete in a shrinking pool. China is introducing its own ETS in 2021 and its remit will grow significantly in the coming years.”