Robert Minter, Director of ETF Investment Strategy at abrdn.

By Robert Minter, Director of ETF Investment Strategy at abrdn.

Industrial metals are a unique asset class within the commodities sector that may allow investors to gain exposure to the global green energy transition.

They also provide diversification potential within an investment portfolio, with ETFs serving as an excellent vehicle for accessing their exposure.

What are industrial metals?

Industrial metals such as copper, aluminum, zinc, and nickel are at the foundation of the global energy transition. Though not always spotlighted, these metals are at the foundation of the global energy transition, often serving as core or supportive components of transitional technologies.

As investors look to opportunities in renewable infrastructure, these metals should be in the conversation for this reason alone.

Table 1: Understanding industrial metals

*See the 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 be a nice complement to an investment portfolio, helping to manage risk and mitigate volatility. Plus, they tend to thrive in inflationary periods.

Industrial metals and the energy transition

The global energy transition away from fossil fuels toward renewables may well be one of the largest projects in human history. And almost every renewable energy system — including electric vehicles, wind turbines, solar panels, grid-level batteries, and carbon-capture systems — uses large amounts of industrial metals. Combined, these reasons spell a compelling investment opportunity.

Consider electric vehicles (EVs), for example. Demand for EVs has swelled in recent years. In fact, sales of EVs (fully electric and plug-in hybrids) doubled in 2021, with record-breaking sales of 6.6 million, according to the International Energy Agency. The number of EVs on the road by the end of that year was about 16.5 million — three times the amount on the road just three years earlier, in 2018.

Since then, demand has remained strong. And whether it’s Wuling Hongguang Mini (the best-selling EV in China), Volkswagen’s ID.4, or Ford’s F150 Lightning, all of these EVs use up to five times more copper than traditional internal combustion engine vehicles. They also require more aluminum to offset the weight of the battery and improve efficiency, while the batteries themselves need nickel.

And EVs are just one piece of the puzzle. The potential only gets greater when you consider that the European Union, US, and China have all made massive commitments to renewable energy. These nations combined represent about $52 trillion of global GDP — and this doesn’t even account for the 191 other countries that have committed to the Paris agreement The fact that energy is critical to all of these countries’ economies speaks to the fact that they’re highly motivated to make this transition, and remain so even in a more challenging economic environment we currently face.

With the durable scope of these commitments and the scale of these projects expanding, expect demand for industrial metals to steadily increase for many years to come, and as it does, investors will be keen to access vehicles that thoughtfully and efficiently furnish this exposure.

IMPORTANT INFORMATION

*More information regarding Table 1:

• Index weights: Bloomberg, June 30, 2022
• Electrical bus, copper: Visualcapitalist.com
• Photovoltaics, aluminum: Reuters, “Which metals will gain most from a green energy revolution?” 2020.
• Wind turbines, zinc: World Bank, 2020.
• Hydroelectric installations, nickel: Nickelinstitute.org

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)