By Robert Minter, Director of ETF Investment Strategy at abrdn.
Industrial metals are a unique asset class within the commodities sector that can provide investors with exposure to the global green energy transition.
They also offer the potential for diversification within an investment portfolio, with ETFs being an excellent vehicle to access their exposure.
What are industrial metals?
Industrial metals such as copper, aluminum, zinc and nickel are the basis of the global energy transition. Although not always spotlighted, these metals are the foundation of the global energy transition, often serving as building blocks or supports for transition technologies.
As investors look for opportunities in renewable infrastructure, these metals should be in the conversation for that reason alone.
Table 1: Understanding industrial metals
*See Important Information section for source information
Industrial metals have a low correlation to other asset classes, such as equities and fixed income, so they could make a good addition to an investment portfolio, helping to manage risk and mitigate volatility. volatility. Plus, they tend to thrive in times of inflation.
Industrial metals and energy transition
The global energy transition from fossil fuels to renewables may well be one of the greatest projects in human history. And almost all renewable energy systems – including electric vehicles, wind turbines, solar panels, grid-level batteries and carbon capture systems – use large amounts of industrial metals. Combined, these reasons make for a compelling investment opportunity.
Take, for example, electric vehicles (EVs). The demand for electric vehicles has increased in recent years. In fact, sales of electric vehicles (all-electric and plug-in hybrids) doubled in 2021, with record sales of 6.6 million, according to the International Energy Agency. The number of electric vehicles on the road at the end of this year was around 16.5 million, three times the number on the road three years earlier, in 2018.
Since then, demand has remained strong. And whether it’s the Wuling Hongguang Mini (the best-selling electric vehicle in China), Volkswagen’s ID.4 or Ford’s F150 Lightning, all of these electric vehicles use up to five times more copper. than traditional internal combustion engine vehicles. They also require more aluminum to offset battery weight and improve efficiency, while the batteries themselves require nickel.
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And electric vehicles are only one piece of the puzzle. The potential only increases when you consider that the European Union, the United States and China have all made massive commitments to renewable energy. These nations combined account for around $52 trillion of global GDP – and that’s not even taking into account the other 191 countries that have committed to the Paris agreement. The fact that energy is critical to all of these countries’ economies is a testament to the fact that they’re highly motivated to make this transition and remain so even in the more difficult economic environment we currently face.
With the enduring reach of these commitments and the scale of these expanding projects, expect demand for industrial metals to grow steadily for many years to come, and as it does, investors will be eager to access vehicles that provide that exposure in a thoughtful and efficient way.
*More information regarding Table 1:
- Index weightings: Bloomberg, June 30, 2022
- Electric bus, copper: Visualcapitalist.com
- Photovoltaic, aluminum: Reuters, “Which metals will win most from a green energy revolution?” 2020.
- Wind turbines, zinc: World Bank, 2020.
- Hydroelectric facilities, nickel: Nickelinstitute.org
(The opinions expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)