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Playing Catch-up

By January 28, 2021 No Comments

Like many in the energy business, I marvel at how fast the cost of producing renewable power, LED light bulbs and lithium-ion batteries has fallen over the past decade. Depending on what’s being measured, some costs are down by more than 90%.

Should we assume these downward-trending cost curves are sustainable? And will this type of cost reduction be applicable to other emerging clean energy devices?

Based on advances in technology and more efficient manufacturing processes, the short answer is a qualified yes. Yet we shouldn’t be blinded by the glow of the new economy — things like data science, process engineering, robotics and advanced materials — which, to date, have been the principal driver for achieving these cost reductions.

From the shadows, we’re now seeing that the old economy isn’t so old after all. Much of the new energy transition hardware requires earthly resources — metals and minerals — which are suddenly escalating in price. Copper, nickel, cobalt, platinum and rare earth elements are all inflating as electric vehicles, and the electrification trend in general, start pulling on constrained resources. For example, nickel prices just closed shy of a five-year high, copper is up 30% from pre-COVID levels, and cobalt has jumped 25% in value just in 2021.

I should note that the solar industry’s achievements are often quoted as a template to how fast clean energy costs can come down. But let’s be careful with that. Made from silicon, the most plentiful element in the earth’s crust (think sand), solar panels don’t have a resource constraint problem. Many of the vital metals and minerals needed to electrify transport and other industrial segments of our economy don’t enjoy the same abundance.

Picking up speed

Rising resource costs of these more constrained commodities shouldn’t surprise us. The inflection point of demand for electric vehicles has been crossed in a handful of countries, including China. That’s the point — a market share of around 5% or more — when consumer adoption begins to take off exponentially. More variety on showroom floors, including pickup trucks and SUVs, will add to the momentum.

There are now dozens of EV manufacturers at various stages of development around the world. Tesla is the leader, of course. Volkswagen is going all-in, and General Motors is expected to accelerate from a trot to a gallop by mid-decade. Upstart companies are collectively raising billions of dollars to roll out new models. Expectations for EV sales are at high voltage, and now those expectations are zapping the resource sector. No wonder some investment analysts speak about a forthcoming “commodity super-cycle.”

Consider the scale of what’s happening.

Tesla sold just shy of 500,000 vehicles last year. It’s an impressive number, but — in a world of a billion-plus cars — it’s still de minimis. At Tesla’s current rate of sales, it would take over 2,000 years to replace the world’s fleet of combustion-engine vehicles. We’ve barely dented the market for EVs.

Now let’s look at what it takes to power one of them. A typical 75 kWh electric car battery is 5,000 times the capacity of the one in your mobile phone. And that’s for a medium-sized sedan like Tesla’s Model 3, not the super-sized pickup truck or SUV that most people are aspiring to.

From a money lens, the demand for natural resources is getting to be much more than a dent. keeps track of the stats. The latest data points from its EV Metal Index, November 2020, show that sales of lithium, graphite, cobalt and nickel just for making EV batteries have risen rapidly to US$325 million per month. A mere four years ago, that number was one-tenth of that. And we’re going to sell how many EVs by 2030?

A wakeup call

The point is, we don’t need a spreadsheet to realize that the transition to an electrified clean energy economy is going to result in a monumental draw on metals and minerals from the earth’s crust. And it’s going to cost a lot more money. In the last few months, rising commodity prices are a wakeup call to that reality. In the old economy, an inflection of demand that pulls on constrained resources leads to price spikes.

At a minimum, the assumption that costs for new energy technologies will fall smoothly and forever needs a serious rethink, especially for metal-intense segments of the business. At worst, commodity price inflation that passes through to end customers will restrain adoption of new-age products.

Sure, the challenges can be overcome. When commodity prices rise, more resource projects are permitted, financed and built (often in unsavory places). We’ve seen it before: The world grew its oil production from nothing to an unfathomable 100 million barrels a day. But it took 150 years and hundreds of trillions of dollars. Along the way, there were plenty of commodity super-cycles, not to mention geopolitical issues, which is a whole other supercharged issue when it comes to rare and geographically concentrated minerals.

The resource world doesn’t move nearly as fast as technology, which is why commodity value is now chasing technology value. And the larger lesson is that the new economy can’t go anywhere without the old.

This article appeared in the January 28, 2021 issue of the Financial Post.

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