Galeanu Mihai
Galeanu Mihai
The investment landscape surrounding the low carbon transition is poised for change and opportunity. Oscar Pulido explores the brown-to-green transition and the role of mining materials in the transition to a low carbon economy. Joined by Olivia Markham, a portfolio manager from BlackRock's Fundamental Equity Team, together they discuss the changes in the global economy, companies' approach to reducing carbon emissions, and the investment opportunities in the low carbon transition.
Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido. The BlackRock Investment Institute has outlined five mega forces that are shaping the macroeconomic landscape and the transition to a low carbon economy is one of those.
This brown to green transition is underway and represents a journey from fossil fuel reliance to renewable energy sources. It is a stepped process that is not only a response to environmental challenges, but also a structural shift in the evolving investment landscape. This transition requires a significant amount of capital to propel us forward into a greener world. Governments, companies, and investors are all channeling resources into supporting low carbon transition targets that will reshape industries and create new opportunities to help me unwrap the various layers of the low carbon transition. I'm pleased to welcome Olivia Markham, a portfolio manager from BlackRock's Fundamental Equity Team.
Olivia and I will explore the changes she's observing in the global economy, how companies are evolving their approach to low carbon emissions, and why investors should take note of this mega force.
Olivia, thank you so much for joining us on The Bid.
Olivia Markham: Thanks for having me here.
Oscar Pulido: So, Olivia, one of the topics that we have covered a lot in the podcast over the last few months is this topic of the mega forces, which are these structural investment themes that the BlackRock Investment Institute says will characterize market movements for many years ahead. One of those mega forces is the transition to a low carbon economy. And there's this other term that we hear which is the brown to green transition. But maybe we can take a step back and talk to us a little bit more about what does it mean when we talk about the brown to green transition.
Olivia Markham: So, this terminology, in its basic form, it really involves moving from today's economy, which is based on fossil fuels, it's got high carbon emissions associated with it, and we're trying to move towards a green economy, which has lower emissions associated with it.
Quite simple, in its basic construct, when we think about what's really driving the change, we are moving away from just thinking about the cost of an activity, and we're now starting to think more and more about the impact that that activity is having.
There's also another important point we should recognize here, and I think that word transition is really important because this isn't a change that happens overnight. It takes time. It can be a stepped process, but it's going to involve a lot of capital, there's a lot of opportunities and it's a really important conversation that the investment community should be having.
Oscar Pulido: You said this transition takes time and you also said it takes capital. Maybe on the capital part, how much are we talking about? What kind of investment is needed to transition to this greener world and what areas will see the greatest demand?
Olivia Markham: In my view, the low carbon transition going to be one of the greatest re-mobilizations of capital that we've seen in the global economy for some time. There's a lot of forecasters out there trying to estimate the cost of doing this. The numbers are incredibly big - they're in the tens of trillions of dollars. What’s been encouraging is that we have seen over the last couple of years that governments are stepping up. They're providing support, stimulus incentives to start driving this change. But it's not just the funding that's driving it, it's actually economics. Today it is cheaper to build, renewable based power than to build fossil-based power. So, it's just good economic sense to be doing this.
The other thing that we're also seeing is the private sector stepping up. We're seeing huge amounts of capital invested by the private sector into areas such as wind and solar, so that's also helping to drive and accelerate this change. But what I find quite interesting is that when people think about the investment that we need for the low carbon transition, they think about the investments that are going to go into wind and solar infrastructure. They probably think we're going to swap internal combustion engine cars into electric vehicles. They probably think we need charging infrastructure. Maybe they even think we need to upgrade the grid. And I guess that's the obvious stuff. But I think what many people fail to really appreciate is what do we actually need to build this low carbon infrastructure.
And so, from the work that we've done, we can clearly see we're going to need a lot more metals and materials. When you think about a wind turbine, you probably should think about the steel, the cement, the rare earth that we need. Similar for solar, it's the aluminum, the silver, the polysilicon battery materials for the EVs, copper cabling for the grid. The list goes on. So, when I think about this green economy that we're moving to, we're going to have this energy system based on sustainably produced metals and materials. It's very different from where we are today, and that's just going to create a much more materials intensive, global economy going forward.
Oscar Pulido: It is interesting, you do tend to think of that finished product of a greener economy, the wind turbine or the battery in the electric vehicle. But you're saying, hold on a second, there are materials that we need to just create those things. You started to allude to some of them but what are some of these materials that we need to source in order to transition to more of a green economy?
Olivia Markham: I find this, personally, incredibly interesting. We've done a lot of work on this area. We've written white papers on it because the opportunity is really, really big. And maybe let me take you through some examples here. A core component of the energy transition is really electrifying the power sector, and what we think about is effectively having to build out a lot of wind and solar infrastructure to be able to support that.
However, we have a challenge in doing this, and that's principally that the sun only shines during the day and the wind typically blows at night. So, you end up actually having to build a lot more capacity to deal with that lower level of utilization. The numbers start to really inflate. If you think about an example of wind, the amount of steel that's used to build a gas plant and compare that to the amount of steel that's used to build an onshore wind turbine is three times larger. If we think about an offshore wind turbine, it's five times larger, and then we're going to need copper to have the cabling to connect renewables back to the grid, we're probably going to have to expand the grid because we're going to have to deal with the intermittency of renewables.
So, when we think about those commodities that are benefiting, they range. Some of the more traditional commodities, like steel, they do see structural growth from this transition, but what's going to see the really exciting demand is green steel - steel that is produced with lower carbon. There's some really interesting technologies that can produce carbon-free steel that essentially involves using high grade iron ore with hydrogen to take out coal from the production process.
Oscar Pulido: So steel, copper. But the examples you were giving, you were very clear, we need more of those, commodities when we produce infrastructure for a greener economy. And so, it sounds kind of counterintuitive in that we're moving to a greener economy, but we're having to use more of these commodities, which produce emissions when they're created. But again, it sounds like companies are thinking about how to produce these commodities, produce more steel, produce more copper in more eco-friendly ways. And you mentioned green steel, but what are other ways that companies are evolving their processes to be able to produce these commodities in a more eco-friendly manner?
Olivia Markham: I think one of the conundrums that we have with the transition is we clearly need more metals, more materials to enable the transition, but the production of those products are themselves carbon-intensive. And let's be honest, we're not really going to achieve a lot if we take out carbon in the production of energy or in the usage of energy, but just swap those emissions to the production and materials. We're not a achieving a lot in doing that.
So, I think what we really need to see happen here is we need to see the investment into the green infrastructure. But we need to see it happen with materials that are produced with lower carbon. And that really requires the value chain, the material sector, to do their bit. If we can produce these materials in a lower carbon way, we are going to accelerate the transition overall and that's going to have a really big, real-world impact given that the materials sector accounts for around about 17% of global greenhouse emissions today. That real world impact is very significant. But we do have solutions here and we're seeing change happening.
So, in the steel sector, we are seeing the development of low carbon green steel using hydrogen instead of coking coal in the production process. Similarly in cement, there's some really interesting technologies to reduce the clinker content in cement which in turn reduces the amount of carbon content.
Another area that I see companies using, and I think is going to be a growing solution in the future, is this notion of the circular economy and closing the loop. When we look at a number of processing options nowadays, you're seeing companies who are generating energy and generating emissions through that process, try and capture and reuse heat, capturing, reuse water. They're investing more in recycling, they're investing more in carbon capture, they're using waste to make new products. They're making products that will hopefully last for longer. As we do all of these things, we're also going to reduce the emissions overall.
Oscar Pulido: I also get the impression as you talk about what these companies are doing to reduce their emissions, that we're still at an earlier stage of the process. That there -- there's innovation, there's innovations that we've seen but there's still a lot more innovation to come. That's my impression as you're talking about this that there's a lot more innovation yet to come.
Olivia Markham: That's very fair. I mean, if we think about companies and the targets that they are setting to reduce their own emissions, we're going to see some very meaningful emissions reductions by the end of this decade. And the companies are not doing this alone, they really rely on their own supply chain to come up with some of the technologies, the equipment, the battery operated trucks to help them decarbonize, and that's creating a whole new profit pool for that supply chain and in creating more investment opportunities that they can feed into as the material sector is spending more and more money on decarbonization.
Oscar Pulido: Olivia, last year we spoke to your colleague, Charlie Lilford, who like you, is based in London and we talked about electric vehicles. He touched on the fact that about 25% of carbon emissions in the world come from the transportation sector. So, going back to the use of materials, is it fair to say that electric vehicles require more metals and minerals than what we would see in regular combustion engine?
Olivia Markham: Well, the simple answer is yes, but let me give you the spectrum of what we need here. I alluded to it before, but an electric vehicle typically requires about four times the amount of copper. So, then we need to think about how we are going to charge that electric vehicle. So, we're going to have to build in charging infrastructure to do that. An electric vehicle has a much bigger battery, so we're going to need all the battery materials, the lithium, cobalt, nickel, graphite that goes into the batteries today. So once again, much more materials intensive.
So that's just to produce the EV, but then really, we need to power that EV with green energy. So, we're going to also have to use materials to build out, the green infrastructure, the wind, the solar that we need. We've got intermittency issues with some of that renewable capacity. Probably have to have some more battery storage as well. We're going to have to upgrade the grid. We have to connect the renewables via copper back to the grid. So, as you can hear me talking about it, these numbers start to scale and the materials intensity of an EV becomes really quite substantially larger than that, of an internal combustion engine.
Now we have some solutions in time to start to deal with what will become supply challenges for some of those commodities and that's really around recycling. As we start to build up the amount of EVs on the road, the amount of batteries that are out there, we are going to have options and requirements to actually start recycling these batteries more, which will then create a new source of feedstock for the future batteries that we need.
Oscar Pulido: And that was leading to my next question as you're talking about recycling because I did start to think do we have, or does the earth have enough of the materials that you talked about? You took us on a bit of a tour around the periodic table, as you were mentioning, nickel and cobalt and copper, but is there a risk that there's not enough supply of these materials?
Olivia Markham: In theory, we have enough commodities but what we don't have enough of is high grade, low cost and readily permitted projects that can come in and feed this supply that we are going to need. When I look across the board, for quite a long time now, we have become too complacent that commodity supply will always be there. This is a cyclical industry, at times we have too much supply, at other times we don't have enough. But given the long period we've had now of underinvestment into new supply, I do think that we are approaching a point where supply is going to be challenged to meet demand, and if supply cannot respond quickly and that will inevitably see higher commodity prices associated with that.
Now, when I think about some of the commodities that we need, we just haven't had the exploration success over the last decade as what we've had in prior decades. When we look at new projects, they're deeper, often at higher altitude, and all of this translates into a higher cost, to actually go out and build these projects. The industry is becoming a bit more disciplined in how it's allocating capital. and if these projects are not economic at current commodity prices, then that supply will not be built. So, we need to see a move up in commodity prices to try and justify and incentivize that supply to come into the market.
Oscar Pulido: So, this is an evolving space not only commodities, but all the different, areas of the market that must touch the brown to green transition from producers of the commodities to the companies using them, the electric vehicle companies. You're an active stock picker, you spend your day looking at companies that presumably are benefiting from the brown to green transition, and perhaps those that are not, and thinking about how to own those appropriately. So, what are you looking for in these companies as you think about this trend?
Olivia Markham: What I always look for is companies that have got high quality resources. They've got growth optionality, ideally, they're being run by a management team with a proven track record of value creation, and ideally an attractive valuation.
What we are also looking for is companies that have really credible plans around reducing their own emissions intensity from their business. Now, why I think this is so important is, yes, I think it's important for the world, if we can produce the materials with, with less emissions, we're going to have a faster transition. But I think for a number of companies, particularly those companies that are very carbon-intensive, they've had their valuation depressed. because of their carbon risk, the carbon that is associated with their business. And if they can reduce that carbon risk, reduce their carbon intensity, I do think that that's going to improve the multiple that they trade on, the margins they receive and their valuation.
Oscar Pulido: And presumably as part of your research, you get a chance to visit some of these companies as part of your research process. So, what has impressed or maybe surprised you the most when you visit?
Olivia Markham: So, a really important part of our job is getting out and seeing the assets, getting our hard hats on, our boots on the ground, and actually going and seeing what change is occurring. I've been everywhere from R&D centers looking at new battery technologies, I've been to some very carbon-intensive cement plants across Europe and seeing the change that's happening there.
I've recently come back from a trip to Chile, to see some of the capital costs and some of the challenges that they're having in terms of bringing on new copper assets. So, it's a great part of the job. It's really important thing for us to do and what I'm most impressed by is that change is happening.
I think back to some of my early site visits back 25 years ago, and I look at the big yellow trucks. Now big yellow trucks in the past were all driven by people, you typically have about, four person to a truck because people have shifts and there's downtime at maintenance, et cetera. And then, we moved away from having people in trucks and we had instead those people sitting away from the mine in a remote operating center driving the trucks. And then we've taken another step, we no longer have people driving the trucks. They're actually driven by technology. And I look forward to, in the next few years, no longer seeing trucks driving around with diesel fuel coming out the back, I'm actually going to see these trucks being driven by batteries. And I think that just shows the continuous change and improvement that we see across this sector.
Oscar Pulido: Change is coming, and new profit pools are being created. So, it must make for a lot of fun for somebody who gets to sort of look through companies and decide who are going to be the leaders in this brown to green transition. Olivia, thank you for painting that picture of the change that is coming in the world economy. And we look forward to having you on The Bid again. Thanks for joining us on the podcast.
Olivia Markham: Thank you.
Oscar Pulido: Thanks for listening to this episode of The Bid. Be sure to subscribe to The Bid and don't miss the episode.
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.
Sources:
IEA March 2023; World Resources Institute October 2023, BHP and FE analysis, Sept. 2023; BHP analysis, August 2023; Brown to Green Materials Whitepaper, BlackRock Sept 2023; New Energy Outlook 2022, Bloomberg NEF 2022; Tracking The Low Carbon Transition, BlackRock, July 2023
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This post originally appeared on BlackRock.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.