Mining for a decarbonised world - Part 1
One of the most encouraging outcomes of 2020 was the increased focus on electric vehicle (EV) adoption globally, and many global car makers reporting significant growth in EV sales during the year. Tesla continued to grow, but traditional auto makers also saw significant EV sales growth (despite COVID-19 causing havoc to auto sales in general) with Volkswagen, Mercedes Benz owner Daimler and Renault reporting 158%, 228% and 100%+ growth in EV sales respectively in 2020 compared to 2019. The adoption of electric vehicles is an important step in reducing greenhouse gas emissions, but the entire ecosystem and supply chain needs to be considered in order to make a material difference. Simply replacing internal combustion engines that run on fossil fuels with electrical vehicles that rely on electricity from coal fired power stations does not solve the problem, but simply shifts the greenhouse gas emissions from the vehicle to the power station. Further investment is needed in renewable energy sources such as wind and solar, which can eventually completely replace legacy high carbon intensive energy sources. As mentioned in previous posts, we are invested in Infratil that has significant investments in renewable energy developments globally.
The second area of importance is energy storage, both at the grid and in the vehicles. Wind and solar are effective at generating energy only when the natural conditions are right, making energy storage technology crucial for a meaningful uptake of renewable energy. Likewise, EVs must be able to effectively store the energy so the vehicle can be driven on demand. As with all technology, the cost and efficacy of energy storage continues to improve, making a fossil fuel free world a real possibility in the future. However, the battery that stores the energy is made of key materials including lithium, nickel, copper, cobalt and graphite. As the demand for EV and renewable energy increase, so too will the demand for these key materials. Thus, an ethical and sustainable source for these materials is needed more than ever. What is the point of deploying wind and solar farms and electrifying our vehicles when the commodities needed for the technology are emitting significant amounts of greenhouse gases during the extraction and refining process? Many of these minerals are also extracted from mines that use child labour and exploit workers in appalling conditions, another major reason for concern.
Our view is that a tremendous amount of these key battery materials is required for the successful decarbonisation of the world, but the current mining supply chain is not set up in an ethical and sustainable manner. For example, given the scarcity of high-quality nickel, much of the increase in nickel demand linked to battery storage technology will have to come from nickel laterite projects which are much more complex and carbon intensive, defeating the sustainability benefits of installing renewable energy and adopting EVs. Furthermore, the current mining supply chain consolidates ore from different mines for processing into final product, making it difficult for the end consumer to quantify the sustainability and ethical credentials of the finished product. We think that a new mining methodology, particularly for battery materials, is required in order to reap the full environmental and social benefits as we transition to renewable energy.
As you know, we seek to identify companies that are making the biggest contribution to solving major global challenges, while being focused on long-term financial returns. We think that sustainable and ethical nickel supply is one of the key road blocks in decarbonising the world, and so investing in this space has the potential to unlock tremendous environmental and social value. Furthermore, despite the technical and capital risks, given the point in the economic cycle, and the pricing of some assets in this space, the risk-return profile of some investment opportunities looks appealing.
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