By
Justin Leverenz, CFA, Chief Investment Officer, Developing Markets Equities
Andy Lin, Senior Research Analyst
Lun Rao, CFA, Senior Research Analyst
The world has seen many energy transitions over the past couple of hundred years, from biomass to coal to oil to natural gas. But we believe that the current energy transition, from fossil-based energy to renewable or clean energy production, could prospectively drive the largest capital expenditure ((CapEx)) boom in history — and fuel opportunities for investors.
According to the International Energy Agency (IEA), non-fossil fuel sources supplied 19.1% of the world’s total energy needs in 2021, up from 13% in 1973.1 That trend is accelerating due in large part to two forces: The recent growth in electric vehicles (EV) and the shift towards renewable power generation over coal- and gas-fired generation.
In this article, we discuss what’s driving the growth of EVs and renewable power generation and investment opportunities among battery manufacturers and copper producers that we believe may benefit from that growth.
Global efforts could lead to growing EV adoption
Multiple underlying forces should collectively propel the EV adoption rate across the world in the coming decade, offering long-term and sustainable growth for the sector.
- The global effort to reduce emissions. The UN’s goal is to limit the increase in global temperature to 1.5 degrees Celsius over pre-industrial levels by 2050.2 Reducing greenhouse gas emissions is the most direct way of achieving this goal, and the transportation sector accounts for 15% of the overall greenhouse gas emissions.3
- Legislation to encourage EV development. Policymakers across the globe have supported the development of EVs through a variety of policies ranging from specific emission standards and fuel economy requirements to explicit plans to ban the sales of internal combustion cars over the next 10-15 years. In the US, for example, the implementation of the Inflation Reduction Act, which provides both consumer and manufacturing financial credits, should accelerate production and demand.
Opportunities in South Korean EV battery manufacturers
Within this emerging global EV value chain, we believe one of the main beneficiaries is the EV battery manufacturers, particularly those in South Korea. The South Korean vendors have a technological advantage over Chinese peers in the form of higher density battery chemistry, which translates into longer runtimes. In addition, South Korean battery makers are also uniquely positioned in the US, given the geopolitical tension between the US and China. The ongoing issues may make it very difficult, if not impossible, for Chinese battery makers to gain a meaningful presence in the growing US EV market. However, it’s noteworthy that China has been the biggest EV market globally for the past few years. It also has a growing share of EV sales in Europe, anticipated to reach 15% in 2025, with prices typically 20% below European Union (EU)-made models.4 Lithium iron phosphate (LFP) batteries are becoming an increasingly popular choice for standard-range EVs and may play a bigger role. This is important as China plays an important role in the production of LFP batteries, which currently power one in three EVs worldwide.5
Among EV battery manufacturers, we believe South Korea’s LG Chem (1.72% of Invesco Developing Markets Fund net assets as of Sept. 30, 2023) is uniquely leveraged to the long-term EV industry growth and has growth opportunities that are underappreciated by the market:
- Direct majority stake in LG Energy Solutions (not a fund holding as of Sept. 30, 2023), the largest EV battery maker outside of China.
- Leading operation in the upstream battery materials business, supplying critical cathode active materials to the EV supply chain through LG Energy Solutions and potentially other major EV battery makers in the future.
- Well-positioned to potentially benefit from the Inflation Reduction Act in the US market.
Significant spending for transition to renewable electricity
The electricity generation sector represents 25% of greenhouse gas emissions globally.6 Decarbonizing the sector from fossil fuel sources to renewable ones would have a major impact on the UN’s emission reduction goal. Additionally, the EU, US, China, and others have stated targets on the share of electricity required to come from renewable sources or on reducing greenhouse gas emissions by 2030.
Meeting these targets would require a staggering amount of spending. According to Bloomberg New Energy Finance, the world needs to spend a total of $8.3 trillion on renewable energy deployment, including solar and wind, between 2023 and 2030 to achieve the various published goals designed to keep global warming well below 2 degrees Celsius.7
Such a large investment could benefit the supply chain of solar power generation equipment. Companies involved in the manufacturing of polysilicon, photovoltaic wafers/cells, and solar modules could see demand for their products continue to rise. However, while demand growth could be substantial, we’d expect the growth in supply to be ferocious, and we believe there’s a real risk of oversupply, at least in the near term. Additionally, due to the geopolitical tensions between the US and China, solar manufacturers, which are predominately Chinese, will likely face increasing pressure from manufacturers in other countries as they seek a diverse supply base for security purposes.
Opportunities in metals, especially copper
We expect the growth in EVs and the shift toward renewable power generation to drive demand for metals. Lithium, nickel, and cobalt have seen increased demand related to EV batteries. However, we believe copper, one of the oldest metals mined, may play a critical role in the new age of energy transition and is less appreciated by the market:
- The average EV contains up to four times the copper as a traditional internal combustion engine vehicle.8
- The massive build-out of charging infrastructure that’ll accompany the EV proliferation also requires large amounts of copper.
- Solar and wind power generation are far more copper intensive than traditional thermal power generation. According to IEA, each megawatt of solar power generation uses 2.8 tons of copper versus 1.1 tons for a megawatt of coal and gas power generation.9
- As renewable power generation becomes a larger part of the electricity supply, we expect it to change the geographics of our power transmission and distribution networks. New power stations tend to be located in more remote areas, which will require a revamp of the networks that carry and distribute the electricity. Copper will likely be in critical demand as those networks reorganize and expand.
The supply of copper is unlikely to keep up. Copper mines are exceptionally complex and time-consuming to develop due to the required permitting and evaluation processes. It can take up to a decade to complete a mine project. Based on current production plans, Wood Mackenzie expects annual copper production to decline by 1.2% a year between 2023 and 2030 as the productivity of existing mines declines and new supply fails to fully replenish that decline.10
The world would have a copper supply shortfall of 5.3 million tons per year by 2033 if no new copper mines were sanctioned.11 In order to incentivize new projects, we need to have higher copper prices to bring previously uneconomical deposits into production.
Among leading copper producers, we see significant growth opportunities within Grupo Mexico’s (OTCPK:GMBXF) copper mining operation. The company’s Southern Copper subsidiary is the 5th largest copper producer in the world. Grupo Mexico (5.24% of Invesco Developing Markets Fund net assets as of Sept. 30, 2023) is unique from a few perspectives:
- Differentiated geographical exposure, operating copper mines in Mexico and Peru instead of Chile, where most large copper miners have exposure.
- Unique portfolio of mines is exceptionally productive. The group’s cash cost in producing copper, at $0.78/lb in 2022, was the lowest among global copper miners, including Codelco, the largest copper producer in the world (not a fund holding as of Sept. 30, 2023).12
- The largest copper reserve in the world among any listed copper producer. With 44.8 million tons of copper reserves, Southern Copper can mine for the next 50 years without any additional exploration efforts.13
We believe copper will be a key ingredient of the energy transition movement. Grupo Mexico, with its low-cost production and large reserves along with a portfolio of future growth projects, should benefit from copper’s expanded role in the future, in our view.
Footnotes
1Source: International Energy Agency – World total energy supply by source, 1971-2019. The analysis is as of September 2021, but it covers the period from 1971 to 2019. Most recent data available.
2Source: United Nations Climate Change – The Paris Agreement.
3Source: International Energy Agency – Transport.
4Source: International Energy Agency – Global EV Outlook 2023, Trends in electric light-duty vehicles.
5Source: International Energy Agency – Global EV Outlook 2023, Trends in batteries.
6Source: United States Environmental Protection Agency – Global Greenhouse Gas Emissions Data, Aug. 2023.
7Source: Bloomberg New Energy Finance – Energy Transition Investment Trends 2023.
8Source: International Energy Agency – Minerals used in electric cars compared to conventional cars, May 2021.
9Source: International Energy Agency – Solar PV.
10Source: Wood Mackenzie Ltd., Copper Outlook, things to look for in 2023, January 2023.
11Source: International Copper Association – Copper Demand and Long-Term Availability.
12Source: Wood Mackenzie Ltd. Dataset, 2023 Q1.
13Source: Southern Copper, company presentation, 08/25/2023.
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Electric Vehicles And Renewable Power Fuel Emerging Markets Investment Opportunities by Invesco US
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