The path toward renewable energy involves the retooling of global infrastructure, which will require a lot of commodities. Coupled with tight inventory, metals prices have spiked. Kim Parlee talks to Bart Melek, Global Head of Commodity Strategy, TD Securities, on the race for commodities.
- You name the commodity, and they're all pretty much hitting new all time highs-- copper, zinc, nickel. And that is because for the world to use cleaner renewable energy, that requires building new infrastructure. And that infrastructure requires new commodities. Here to tell us how this could be playing out is Bart Melek. He is Global Head of Commodity Strategy at TD Securities.
Bart, great to have you with us. I want to start off with a table that you've supplied to us. We'll bring up the picture on the screen here. And it shows us what commodities are needed to build renewable power infrastructure as well as carbon-based energy. This kind of looks like a condensed periodic table. But there's a whole lot of stuff that's needed here.
- Good afternoon. Thank you very much for having me. Well, I think what you'll note from this particular table is that base metals, particularly copper and nickel, are metals that are very much critical to moving the world to a net zero carbon economy going forward. Copper, nickel, and, of course, there are a few others there as well that are critical if we are to make into a carbon free transition down the road.
- It is interesting. I think if people were watching the headlines, they would have seen-- I saw it blaring everywhere on social media as well as news media that copper inventories on the London metal exchange have hit their lowest level since 1974 earlier this week. So there's a lot that is happening in this market right now.
- A lot is happening in this market. But I would say right now, it's not so much the whole movement to a carbon free world that is at play, but rather it's still climate related, but not so much a long term move towards infrastructure that will use these metals. What we're seeing here is an energy crisis in Asia, and we're seeing an energy crisis in Europe where they are running short of natural gas.
They have problems feeding smelters because electricity sources from renewable sources have basically dried up. Rivers aren't flowing as quickly as they used to. So hydropower is no longer available. And somewhat prematurely, many European countries have shifted over to renewables without really having the base load of power. And that-- at a time where wind flows aren't normal, where rivers aren't flowing, and natural gas fields haven't been invested in-- has resulted in a very, very tight market.
And now, a lot of jurisdictions have to make a choice-- use electricity for the population or feed smelters that are extremely power intensive. So they've chosen to cut power to many European smelters. Chinese producers are cutting power to zinc smelters, to aluminum smelters. And that, along with the recovery after COVID, has resulted in a very, very tight base metals market broadly.
- It's an incredible story when you think about it because of what you're talking about-- a crisis of climate is restricting or part of the reason for part of the supply restrictions right now. And then, of course, what you need to help against that is the very thing that you can't get which is causing these tight supplies. But if we go back to that table that you brought and the clear lines across the thing were, I think, were copper and nickel were the big ones. So maybe tell me what you see for those, given that thesis you just put forward.
- Well, for copper-- copper is going to continue to stay quite tight for the next 12 months or so. We expect that to loosen up. But before that happens, the assumption is that smelters are going to go back to capacity where European authorities will-- companies rather-- will again use expensive power to smelt. We're not quite sure that is. But when you look at mine supply, we should have plenty of copper for the next few years.
The problem is going to be beyond the next few years. We're really not seeing anywhere near sufficient amount of capital going into these projects. And remember, it takes 7 to 10 years to get a mine to actually produce metals. So money needs to flow in there today. That is not happening. And in part, because many investors are worried about ESG requirements, they are worried that they may be perceived as being in a dirty industry, that the money isn't fine, but the irony is you're going to need copper, you're going to need nickel for that to happen.
For now, nickel looks OK as well. But again, that's assuming that all the smelters will be back in line, that key producers like Norilsk will, again, start working at full capacity. And the assumption is that they will continue to invest. And again, in China, we're not quite sure if there is going to be sufficient power to take the pig nickel to process into pure nickel that is used in stainless steel.
So we think that, for the next few years, there's plenty of metal and the problems will start later. But it could very well take-- it may not happen. And we will be in a tight market configuration from now on. It could loosen up, but maybe not much at all.
- I've only got about 30 seconds, Bart. But I always get worried when I hear sometimes that every case leads to things moving up. I mean, there's got to be another side of this where-- or is there? I mean, is there any other possible scenario to say, prices could move down because of this happening? It doesn't sound like it.
- Well, there's always a negative scenario. I can think of one right now where we have a big energy price shock globally because of some bad regulatory decisions and unfortunate developments on the climate side that prevented hydropower from materializing and wind power. What we could have is a very large and maybe semi-permanent increase in energy prices that will turn the public against going green, which is something we're going to have to do.
But the risk here is in countries like the United States. If gasoline goes well over $5 a gallon, there might be a big political backlash. And governments may not try this for a while again in spite of all the promises they are making to be carbon neutral over the next few decades. So I think that is a risk. It's very much a political risk where this cannot happen until we are ready. And there is infrastructure pushing it too quickly may do a lot more harm than good. For now, we are stuck with fossil fuels, I believe.
- Fascinating discussion, Bart. Pleasure to have you with us. Thanks so much. That's Bart Melek from TD Securities.