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Covid Response Boosts Green Metals

One policy response to the COVID-19 pandemic has been a determination to use fiscal stimulus to promote a "green" recovery.

· 09/03/2020 10:29

One policy response to the COVID-19 pandemic has been a determination to use fiscal stimulus to promote a "green" recovery.

The UK government has promised a green recovery, but the EU has set the global standard. €91 billion has been promised for green heating and home energy efficiency. It plans to offer €20 billion to subsidize clean cars over two years and build 2 million charging points. It has also earmarked €25 billion for renewable energy and up to €60 billion for the production of clean hydrogen and zero-emissions trains.

Metals Recovery

This global impetus is a further fillip for "green" metals such as copper, palladium and platinum. Each plays an important role in current and emerging technologies that may help decarbonization. They have already proven to be resilient to the economic downturn. Palladium prices have increased by 53% over the past 12 months and by more than 1,500% since 2009. Platinum and copper have bounced by 60% and 40% respectively from their lows in March.

For copper, the world's most important industrial metal, the rebound has been largely driven by cyclical factors. China imports 40% of all global copper supply. It has put in place a direct fiscal stimulus of $506 billion, $140 billion issuance of special treasury bonds and approval for local governments to borrow up to an additional $527 billion. Much of that stimulus will be spent on infrastructure. The biggest use of copper in China is in building and construction.

China's economy has recovered rapidly from the COVID lockdown. The Caixin China General Manufacturing PMI rose to 53.1 in August. (50+ indicates expansion), the strongest reading since December 2019. The equivalent services PMI is at a 10-year high of 58.4 and the stock market is at a five-year peak. In June, industrial production increased 4.4% compared with the same month a year earlier.

Green Giants

China's response to Covid and rapid economic revival has undoubtedly been important for copper prices. But in the longer-term, the red metal also has powerful secular trends supporting it. One quarter of all carbon emissions come from the production of electricity and heating. Improving technology is rapidly making onshore wind and other renewables far more financially viable.

In Germany, where 40% of electricity still comes from burning coal, the Levelized Cost of Energy (LCOE) for onshore wind is now between $48 and $63/ megawatt hour (MWh). Coal costs $52-106/ MWh and gas $79-109/ MWh. The Copper Development Association estimates that every wind turbine uses between 2.5 and 6.4 metric tons of copper per megawatt. The wiring and cabling of solar panels on average require 5.5 metric tons of copper per megawatt.

A standard sized electric car uses about 183 pounds of copper, according to the Copper Development Association. Bloomberg estimates that 14 million public charging stations will be required by 2040 to meet demand,and each requires copper. Copper has been the crucial element in batteries and electricity storage since the Daniell cell was invented in 1836. Getting to net zero greenhouse gas emissions by 2050, the goal of the United Nations, EU, UK and most other nations, will need a lot of copper.

Cleaner Cars

But copper is not the only metal that is a likely beneficiary of the ambition for a greener future. The platinum group metals (PGM) – palladium, platinum and rhodium – are integral to reducing emissions from cars powered by gasoline or diesel. Catalytic converters used to contain an average of $27/ unit of palladium under the old EU regime. New emission standards (and higher prices) have driven that up to $420. The "China 6" regime is similarly rigorous.

Palladium is now more valuable than gold. It is becoming scarce.  Even though global light vehicle sales fell by 4% in 2019, palladium usage rose by 10% (895,000 ounces). Platinum is an alternative but it is hardly cheap itself and there is a meaningful difference in performance. PGM loadings make cars cleaner per liter of engine capacity and there is no alternative technology on the horizon.

Platinum seems set to play a vital role in emerging technologies. Hydrogen has generally been produced with fossil fuels. The carbon footprint of producing hydrogen from natural gas is higher than burning the gas. Platinum is the most effective catalyst in hydrogen-powered fuel cell electric vehicles (FCEVs) using Polymer Electrolyte Membrane electrolysers. The only output from these FCEVs is water; there are zero emissions.

Anglo Platinum estimate that each FCEV requires between 10 and 15 grams of platinum versus 7 grams that is the standard for current diesel cars.

Currently more than 80% of FCEVs are cars. But the real prize is the commercial vehicle sector and ultimately marine and air transportation. That is especially attractive as these are significant contributors to carbon emissions. These fuel cells can also provide off-grid power in the many parts of the developing world that rely on diesel generators.

COVID-19 has compelled governments into unprecedented fiscal stimulus. With Paris Agreement obligations in mind many have directed a significant share of this largesse toward infrastructure and other initiative aimed at cutting carbon emissions. That has been, and may continue to be, a positive for green metals.

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