Niche investors look to EVs and green energy metals in era of climate change

Gold's charm has endured for centuries, and its traditional appeal as a store of wealth continues to enchant investors as prices hover near record highs this week amid fears of an economic slowdown in the United States following the collapse of two banks.

However, growing climate change risks are spurring a niche group to put their faith in a relatively obscure asset: metals used in electric vehicle batteries and for green-energy generation.

Demand for EV and green-energy assets is growing as governments move away from fossil fuels and push towards an array of metals used in clean energy such as lithium, copper, nickel and cobalt.

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"I think investing in these assets is the equivalent of investing in oil in 1950 ... Now you have this green energy revolution and lithium and copper are the oil," said Will McDonough, co-founder and CEO of EMG advisers.

The company in December rolled out an exchange-traded fund (ETF) on the New York Stock Exchange weighted with a portfolio of futures contracts in battery-grade metals such as copper, lithium, nickel and cobalt.

Other asset managers such as Sprott have also either launched ETFs or listed vehicles, the composition of which varies, on prominent exchanges.

Investors typically flock to safe-haven assets like gold and silver during times of volatility, mainly because the precious metals have predictable supply and demand, industry executives say.

"I believe copper is the safer place as it has both limited supply and demand, as opposed to gold ... which has far less use in global societies and manufacturing," said McDonough, whose company's ETF has allocated around 75 per cent of its portfolio to copper - a quota that's regularly updated based on demand estimates.

While copper is required in EVs and for green-energy generation, nickel, lithium and cobalt are more widely used in EV batteries.

The amounts required vary, but executives expect overall demand for such metals to multiply as climate change poses a growing risk to the planet.

Unless yearly global investments in energy transition technologies more than quadruple to US$5 trillion, the world will fall short of limiting global warming to 1.5 degrees Celsius, an International Renewable Energy Agency report said last month.

Part of the case for investing in green-energy metals also stems from China's dominance over mining assets and its position as a global processing hub for the metals, meaning their availability can depend upon a country's relationship with Beijing.

"Even if China does not control the physical goods, they have secured the offtake agreements and control the processing," McDonough said. "If there is any incremental strain from China's relations with the rest of the world, maths will tell you that it will create an increase in the price of the metals."

China shut down lithium production for 30 days at the turn of the year, taking 13 per cent of global supply off the market. "That is the equivalent of Russia saying I am not exporting gas now for 30 days," McDonough said.

Lithium prices were up 180 per cent through 2022 to US$77,057 per tonne, though prices cooled slightly this year given tepid Chinese demand. Gold prices rose to an all-time high of more than US$2,000 an ounce on April 6, up about 1.5 per cent from a year ago.

Despite their long-term appeal, another industry expert cautioned retail investors that they should be prepared to dig in their heels rather than eye quick profits.

"Those who invest should stay invested for a long while," said Rick Rule, a global investor and speculator, adding that an economic depression could affect prices "so investors should have the psychological capability to withstand volatility".

Traditionally, copper was most commonly used in transmission cables, building construction and home appliances, but over the next decade, demand will mainly come from the renewables sector, said Florian Grunberger, a senior analyst at research firm Kpler.

Current demand is mostly driven by the construction sector, especially within China, so the price of copper is expected to trend at around US$4.30 per pound (454 grams) through the second quarter of 2023. Medium- to long-term prices will increasingly be driven by renewable energy demand, with copper likely to cost around US$5 per pound from 2024 onwards, Grunberger said. Major players are well-positioned to meet increased demand, he said.

Industry executives say investment interest in battery-related assets is growing.

Sprott listed its nickel miners ETF (NIKL) on the US-based Nasdaq on March 22, providing investment exposure to nickel miners. It has been well received "as evidenced by strong and increasing volume over the early days of trading", said John Ciampaglia, chief executive officer of Sprott Asset Management.

Sprott also listed a lithium miners ETF on the exchange on February 2, with Ciampaglia saying this likewise enjoyed "a healthy amount of trading activity". The company does not have an ETF dedicated to battery metals, but it does have an energy transition materials ETF with considerable exposure.

It's not known if the funds have whetted the appetites of Asian investors yet. China and India alone account for more than half of the physical demand for gold.

"Given the importance of battery metals to economies in Asia, we expect to see interest from investors in the region," Ciampagla said.

This article originally appeared on the South China Morning Post (SCMP).

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