Many analysts say the pandemic is accelerating the shift from fossil fuels to clean energy. It’s too early to say if that’s true but it has certainly increased the green grandstanding from politicians and CEOs. BP claims it is no longer an oil company, and aims to be ‘carbon neutral’ by 2050, while Toyota, the world’s biggest carmaker, will no longer make internal combustion engines from 2040. The UK was the first major economy to legally commit to ‘net zero’ greenhouse gas emissions and similar pledges are now being announced by governments across the world. With Glasgow hosting COP 26 – the World Cup of environmental shindigs – this November expect plenty more ambitious green commitments.
There is just one problem – most of these promises are completely impossible to deliver. Take electric vehicles for example. Replacing the existing global fleet of internal combustion engines with EVs would require mining every single pound of copper in all of the world’s copper mines. Another solution could be biofuels. Yet even BP’s most optimistic scenario in its annual energy outlook says bioenergy will only account for 10% of primary energy demand in 2050. And that’s with billions of dollars of investment and massive increases in biofuel production. It’s a similar story for hydrogen, which under BP’s most radical assumption, would provide just 18% of primary energy supply in 2050.
That doesn’t belittle efforts to fight climate change – just highlighting how difficult it will be to wean ourselves off oil. Simply meeting the legally-binding pledges that have already been made will radically upend natural commodity markets. Nevertheless the energy transition will continue to pick up speed. For politicians, fighting climate change helps to win votes, while touting a company’s green credentials helps CEOs boost the share price. The energy transition will help some companies and commodities, while hitting others. But it all bodes well for one part of the world in particular – Latin America. The region is home to the world’s largest reserves of copper and lithium, it is the biggest biofuel producer and is emerging as a leader in green hydrogen.
Clean energy is already a crowded trade. Copper is at record highs, while shares of EV manufacturer Tesla have tripled in the last year. Yet despite all the talk of a commodity supercycle, the prices of key natural resources are still well below previous peaks. The Commodity Research Bureau index is currently at less than half of its 2008 peak. Indeed it is lower than it was at any point during the last supercycle from 2004 to 2014. The current environment of rising inflation should also prove positive for natural resource prices. Last month’s 3% rise in US core consumer prices – a key inflation measure – was the highest monthly increase since the mid-1990s. With the Federal Reserve seemingly unworried about rising prices – it is focusing more on full employment – we are likely to see higher inflation. That’s good for commodities, which are one of the few asset classes that perform well in an inflationary environment.
Michael Scherb, the founder and CEO of Appian Capital Advisory, a private-equity mining investor that owns mines in Latin America, believes cleantech metals will go higher. “Mining companies are classic ‘lag’ businesses with long lead times for mines to get into production, so they were slow off the mark in responding to clean tech demand. That’s reflected in the current prices for copper and nickel. People realise that there is going to be a supply and demand mismatch. However, I don’t think that even current prices reflect the full extent of the gap between supply and demand, which will become more apparent in the future.” Another factor is declining ore quality, says Scherb. “The average copper grade will decrease from 1.8% to 0.8% by 2040, which means mining deeper for poorer quality ore, which will increase costs. That will feed into the industrial production chain, which will push inflation in the sector so it’s an important issue.”
So the world is going to need immense amounts of copper – and that’s where Latin America comes in. Chile and Peru are the world’s largest copper producers – accounting for 44% of global output. Yet their neighbours have more exciting exploration potential. Miners up and down the Andes believe that Ecuador and Argentina likely have as much copper as Chile and Peru. Wojtek Wodzicki is the CEO of junior explorer NGEX Minerals and has overseen three massive copper discoveries in Chile and Argentina. “All along the Andes you see incredible deposits. Chile and Peru have exploited that, with their long history in mining, whereas Ecuador, Argentina and Colombia probably have much more to be found. An area with promising geology but little exploration equals opportunity.”
[quote]The world is going to need immense amounts of copper – and that’s where Latin America comes in…[/quote]
EV’s use four-times as much copper as conventional cars, which explains why the red metal gets a boost from energy transition talk. But nickel, cobalt, manganese and lithium are also cleantech metals that are used in EV batteries. All four are abundant in the region, but Latin America is particularly dominant in lithium, where the ‘lithium triangle’ of Bolivia, Argentina and Chile holds 55% of global reserves.
Latin America also has advantages above the ground. The same forces that are pushing for the energy transition are part of a wider move to improve environmental and social governance. The massive growth of ESG investing – it grew by 50% in 2020 to $1.7trillion – means new mining projects will also have to explain their social and environmental impact. And that will favour Latin America. For example, its main competitor in cobalt production is the Democratic Republic of Congo, where child labour is rife. Another advantage is electricity. Thanks mainly to massive hydroelectric plants, Latin America has the greenest power grid in the world with around 60% of the region’s electricity coming from clean sources. Being able to hook up to a green grid improves the environmental profile of Latin American mining projects, which will help them attract more investment.
Not just copper
Latin America’s energy transition advantage is about more than just cleantech metals. By 2050 oil is still expected to make up 40% of primary energy demand. That’s about 120 million barrels per day of oil and gas equivalent that will need to be produced. There are lots of different studies, with slightly different estimates but the gist is the same. Oil isn’t going anywhere fast. The best explanation comes from a biofuels magnate, Erasmo Carlos Battistella, the founder of ECB Group, a Brazilian firm building Latin America’s most advanced biorefinery. “Look back around 100 years to the last energy transition when oil began to replace coal. Even though oil is dominant, coal is still being used today.”
However, as electric vehicles and biodiesel eat into oil’s stronghold of transport, while renewable generation does the same to gas in the power market, the world will start becoming more selective about what hydrocarbons it uses. More expensive and dirtier plays, such as Canadian oil sands or US shale, are likely to lose market share to cleaner and cheaper operations. And Latin America, which has a natural oil and gas surplus – it has 10% of global population and 20% of the world’s hydrocarbon reserves – as projects that can thrive in oil’s new era.
[quote]Latin America is already the world’s largest producer of biofuels and ECB Group is now building the region’s first-ever second-generation biofuel plant…[/quote]
That conventional oil production will be complemented by biofuels. Latin America is already the world’s largest producer of biofuels and ECB Group is now building the region’s first-ever second-generation biofuel plant. The advantage with second-generation fuels is that they can be poured straight into an existing engine without being mixed with conventional petrol or diesel. They can also be made with a wider range of feedstock – ie agricultural waste or bi-products – which counters the old criticism that biofuels cut food production. BP and Shell have already signed contracts for 90% of the new plant’s production. Biofuels will never have the mass to completely replace oil, but they are very competitive in areas where it is difficult to electrify vehicles. For example, ECB will produce bio-aviation fuel, which is the most effective way to reduce air travel emissions.
Hydrogen is also another renewable fuel where Latin America has an advantage. Hydrogen, the most abundant element in the universe, is found all over the earth. However, extracting it from water via electrolysis is a costly and energy-intensive process. The only way it can really help governments meet their emission pledges is if the electrolysis is powered by renewable energy – making so-called green hydrogen. And that’s only economically viable in places where the price of renewable energy is very low. Step forward Chile. A solar boom in its Atacama desert – one of the world’s sunniest places – has given Chile plentiful supplies of cheap renewable energy. Chile has announced a $300million fund to accelerate green hydro production to 25 gigawatts of electrolysis production by 2030. That would be a massive amount for a small economy like Chile. For example the EU is aiming for 40 gigawatts of production by the same time.
The energy transition won’t play out exactly according to the politicians’ pledges, but regardless of which technology comes out on top – Latin America will benefit.
A version of this article was first published in MoneyWeek on the 27th of May