The Rise of Raw Materials: How should companies adapt to growth in demand?

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Although there are several pathways through which the global economy can achieve its target of limiting global warming to 1.5°C, no matter which decarbonization pathway we follow, there will be fundamental demand shifts.

And, metals as well as rare earths will be at the core of these decarbonization efforts as we move from fossil fuels to wind and solar power generation, electrified transportation and hydrogen production.

Besides the rise in demand for raw materials like green steel for carbon free infrastructure, nickel and copper for EV technology, the demand for niche commodities such as lithium and cobalt for batteries, tellurium for solar panels, and neodymium for the permanent magnets used both in wind power generation and EVs?will most likely increase exponentially.

The problem, however, is not stemming from the lack of raw materials in earth's crust, but it is actually a consequence of a solution to another problem that we are trying to solve: Achieving the net zero target by transforming the way we live, move around, work, produce, consume etc.

And when we get into this transition all together, all at the same time, in a relatively at faster pace, supply, demand and price volatility becomes inevitable.

So, what might happen as we go down this road?

The sunny day scenario looks like; as demand accelerates and prices react, the industry is able to bring in new supply relatively quickly. In such cases, the technological transition follows the planned growth, where the commodity does not become a structural bottleneck, even if there is short-term squeeze.

But we all know that the sky we live under is not always bright and blue. Should the dark clouds appear in the horizon, the industry might not be able to bring in new supply fast enough and technological innovation leads to high demand materials' substitution within that overall industry, which will eventually pull down the growth.

There is also a hybrid scenario in which the most demanded raw materials get substituted by new and more available ones with the help of new technologies. In this case, rather than materials substitution within the industry, the end-user sector is forced to alter its technology mix. But a different bottleneck may emerge this time around. For instance, non-tellurium-based solar panels may have lower performance, which may lead to a shift toward more wind-generated power, adding pressure on neodymium.

Well, scenarios are useful tools in strategic planning but aside from future possibilities, one thing is certain; the energy transition will force every sector of the economy to adapt, each with its own specific challenges.

That's why the companies, as the consumers of raw materials, will need to factor potential resource limitations into their technology development and growth plans by;

1. Adapting their technological mix and identifying short and long term limitations as well as capabilities of their technology rollout. And then, if possible, they should invest in new technologies in engineering of raw materials that may be difficult or expensive to source.
2. Securing their supplies with long-terms contracts from local suppliers as much as possible. Just look at what Tesla did last week. The company signed its first U.S. nickel supply deal with Talon Metals for its Tamarack mine project in Minnesota. After what Talon described as “lengthy negotiations”, the deal will see Tesla to buy 75,000 tonnes of nickel over six years, with an option to increase the tonnage.

The shift is inevitable. Therefore, companies taking the right approach will survive the transition.

In this sense, should you need any support or additional information on this, please do not hesitate to contact me on my e-mail:?[email protected]

Let's now carry on with putting global events in perspective.

Here are the latest developments on 8 global trends that I believe will shape the way we do business in 2022.

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1. Management Strategy

Boardroom Challenges in 2022: Why companies should have a BVR (Beyond Visual Range) capability

Even in a bright sunny day, our capability to see things approaching towards us while we move forward in a direction of our choosing is limited to our visual range due to earth's curvature.

And by experience, I can tell that following a "wait and see" strategy, the most costly of all course of actions available and also the most misconceptualized one as the less risky, is not a remedy on this deficiency.

In the board meetings I participate, I sometimes explain the ultimate necessity of BVR capability by giving an example from the World War II. In my opinion, it was not the atomic bomb which consequently determined the winner of the great struggle, but the invention of radar and sonar technology by Allied powers which gave them the ability to see what's out there waiting for them or coming towards them while their opponents can't see beyond their noses. It changed the game so drastically in early periods of the war thus, it determined the winner in the high seas of the Atlantic, in the skies over Britain and Europe and in the island hopping campaign of the Pacific eventually.

And, only a tailored-made horizon scanning function can give the much needed BVR capability to a company.

In a nutshell, horizon scanning is the?experience and insight based examination of potential challenges and likely future developments?which are at the margins of current thinking and planning which must address unexpected issues, as well as persistent problems or growing trends in a continuous manner.

To bear this capability, boards also need to work on more flexibility in agenda setting. As we move into 2022, such flexibility will help boards stay on top of emerging issues and topics, new challenges, and implement strategic alternatives, if the need arises.

Winston Churchill once said "Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong - these are the features which constitute the endless repetition of history."

Learning from the history is a virtue.

2. Geopolitics

Midterm Madness: Will clean energy economy survive elections in the U.S. this November?

The U.S. midterm elections are some 10 months away, but President Joe Biden's administration and allies already foresee a possible scenario in which Republicans take the House of Representatives, the Senate, or both.

President Joe Biden has three years left in office, but some of his domestic agenda may have a much shorter clock which gives the White House a small window of time to pass any meaningful laws in 2022, including the 'Build Back Better' plan, before Congress shifts its attention to the November midterm elections.,

If Democrats in swing districts get cold feet about passing sweeping legislation as voting gets closer, the $2 trillion landmark bill that funds climate initiatives and green economy could be derailed entirely.

Let me remind you here that all 435 members of the House are up for reelection in 2022, and one-third of the U.S. Senate, including Democrats in competitive districts in Arizona, Georgia and Nevada.

And by experience, I can tell you that lawmakers are risk averse during the midterms because they intend to focus on reelection.

The White House says new investments planned under the Build Back Better Framework, will help reduce emissions by well over one gigaton this decade, ensuring the U.S. meet President Biden’s commitment to reduce U.S. emissions by 50-52% from 2005 levels in 2030, create a 100% carbon pollution-free power sector by 2035, and achieve a net-zero economy by 2050.

However, if?Democrats cannot pass Biden’s signature legislation, which includes massive investments in climate initiatives, their failure may convince enough voters to support Republicans in November.

3. Manufacturing and supply chains

The Shortage Saga: What will be the shape of things to come for auto industry in 2022?

2021 was a year both automakers and consumers want to forget, as semiconductor shortages and assembly plant shutdowns emptied dealerships and caused prices to soar. But it was also a year when electric vehicle sales surged.

In 2022, shortages are expected to leave dealerships with empty inventories, and consumers with even higher prices. Still, there will be more options for electric vehicle buyers.

Planning issues hit automakers in 2020 and 2021. As Covid-19 struck, automakers cut production amid lower demand and canceled parts orders. However, when the demand rebounded and the production was ready to restart, they couldn’t find the semiconductors they needed, causing another production cut.

The industry is estimated to lost around $210 billion in revenue in 2021. While shortage in semiconductor supplies has eased some, they’re still far from their level before the pandemic. That problem could cause more production cuts in 2022. Moreover, the industry faces other shortages affecting tire, interior plastic and seat foam productions.

Because of shortages, the industry produced 8 million fewer vehicles than originally planned. Even if shortage problems are solved, the dealerships won’t be able to restock until well into 2022, which will cause buyers to deal with limited choices and higher prices. At the end of 2021, the average new vehicle cost $45,000, $8,000 more from December 2020.

While electric vehicles are still a tiny fraction of U.S. new auto sales, the demand for them had doubled during the first half of 2021.

2022 can be the year the EV market explodes. New offerings are expected to play a key role as the number of long range EVs will quadruple this year.

4. Energy Security

The Gas Gamble of Putin: How did U.S. make history in gas exports to Europe?

So far this month, the European Union has received U.S. natural gas volumes five times higher than Russia’s pipeline deliveries, the first time in history in which American LNG has surpassed Russian gas deliveries.?

Last month, at least 30 tankers with liquefied natural gas from the United States?were headed to Europe, where the gas and energy crisis pushed regional LNG prices way above the Asian LNG benchmark and 14 times higher than the U.S. Henry Hub price.

At the same time, Russian gas deliveries have been lower than usual in recent weeks. Low Russian supply and cold weather have been the two main drivers of?rising gas prices in Europe?in recent weeks when Russia’s deliveries via Poland and Ukraine have been lower than historical norms.

Even with normal winter weather conditions, Europe faces storage inventories dropping to a record low of below 15 billion cubic meters (bcm) by the end of March.

Russia is betting on an assumption that without additional Russian imports, the ability to refill depleted storage and to avoid a repeat of last year’s crisis will be limited. But Gazprom has so far been reluctant to make more gas available on the existing routes.

Much to Russia’s dismay, The U.S. government is talking to several international energy companies on contingency plans for supplying natural gas to Europe if conflict between Russia and Ukraine disrupts Russian supplies.

And the start-up of Nord Stream 2 remains the big wild card as Gazprom navigates regulatory approvals. Political relations also remain fragile as Russian troops amass along the Ukrainian border.

5. Legislation

Troubled Transition to 5G: How serious is the threat to US flights?

The U.S. Federal Aviation Administration (FAA) recently announced it gave clearance to an estimated 45% of the U.S. commercial airplane fleet to perform low visibility landings at some airports where 5G C-band will be deployed.

What does it mean and how could 5G disrupt U.S. aviation?

5G relies on radio signals. In the US, the radio frequencies being used for 5G are in part of the spectrum known as C-Band. These frequencies are close to the ones used by radio altimeters on aeroplanes, which measure the height of the aircraft above the ground, but also provide data for safety and navigation systems.

The concern here is that interference from 5G transmissions could stop these instruments from working properly, and cause safety problems, particularly when aircraft are coming in to land.

As you can guess, the risk is potentially very serious. In late 2020, the RTCA, a US organisation which produces technical guidance on aviation issues, published a report on the subject. The report says "potential for broad impacts to aviation operations in the United States, including the possibility of catastrophic failures leading to multiple fatalities, in the absence of appropriate mitigations".

More recently, the US aviation regulator, the FAA, warned that 5G interference could lead to problems with a number of different systems aboard Boeing's 787 Dreamliner. These could make it difficult to slow the plane down on landing, causing it to veer off the runway.

As an alternative solution, planes won't be allowed to use radio altimeters in circumstances where there could be a risk of serious interference. But that will restrict the ability of some aircraft to land, for example, in poor visibility.

Airlines for America, which represents 10 major carriers, has warned that this could lead to more than 1,000 flights being delayed or cancelled in bad weather and mean at times "the vast majority of the travelling and shipping public will essentially be grounded".

To counter that risk, The FAA has established temporary buffer zones around 50 airports, where 5G providers will limit their activities. But these are much smaller than the zones already being used in France, and US transmitters will operate at significantly higher power levels.

Verizon and AT&T have?already delayed the 5G rollout service and have agreed to the temporary buffer zones mentioned above.

6. Sustainability Strategy and Decarbonization

A Breakthrough in Supply: Hydrogen tankers are heading out to sea in 2025

Transporting hydrogen by ship could be possible by 2025 explained Korea Shipbuilding & Offshore Engineering (KSOE) last week. If realized of course, it will be a breakthrough for hydrogen supply, which is currently made by pipelines or trucks. Hydrogen is seen as a clean alternative to fossil fuels especially for industries and transportation.

KSOE, the shipbuilding arm of Hyundai Heavy Industries Group and one of the world’s biggest shipbuilders, wants to seize the opportunity as global interest for hydrogen as a cleaner alternative grows.

The biggest challenge is to keep hydrogen cool enough, at minus 253 degrees Celsius, to keep its liquid form, while avoiding damage to the vessel.

KSOE officials say they already achieved building a concept ship of 20,000 cubic meters of capacity. It seems marginal compared with the largest LNG tankers which can carry up to 266,000 cubic meters, but the size of hydrogen tankers can grow as technology develops.

According to the industry estimates in South Korea, one of the industry leaders in shipbuilding, around 20 ships with a 20,000 cubic meter capacity are expected to be built in the decade starting in 2030.

If demand grows, the number may increase to 200 vessels of 170,000 cubic meters of capacity after 2040.

7. Rare Earth Minerals and Mining

Beyond Oil in Action: Saudis are tapping in zinc and copper deposits

As part of the kingdom’s effort to accelerate foreign investment in the mining sector, and a new mining law that came into effect last year, Saudi Arabia plans to hold auctions for up to three mines in 2022. The auctions are expected to include Khnaiguiyah mines where there is an estimated 26 million tonnes of zinc and copper deposits.

Saudi Arabia’s mining and industry minister Bandar Al Khorayef confirms that Khnaiguiyah will be first. The auction will start at the end of Q1 or the beginning of Q2. The bidding process is expected to take around six months.

Saudi government’s effort to diversify the economy, dominated by hydrocarbons, involves tapping its unused reserves of bauxite, phosphate, gold, copper and uranium.

Covering two million square km, the Kingdom of Saudi Arabia is the largest country by landmass in the Middle East and the 13th largest in the world. The Kingdom’s geology gives it an abundance of natural resources and raw materials.

To date, over 48 minerals have been identified in the Kingdom, including feldspar and nepheline syenite; garnet; gold; zinc; granite; graphite; gypsum; tantalum; high-grade silica sand; kaolinitic clays; limestone; magnesium; marble; olivine; pozzolan; rock wool; silver; and zeolites.

Extraction of these metals is taking place at a rapid pace, especially in high-demand areas such as aluminium and steel. The Kingdom has identified 1,273 sites of precious metals and 1,171 sites of non-precious metals.

It is estimated that Saudi Arabia’s untapped mineral resources to be worth around $1.33 trillion.

8. Defense and Armament

Luftwaffe's Post-Tornado Decision: Will German government lean towards U.S. platforms?

Boeing announced that it intends to expand its German supplier network in case the German Government decides to replace its aging Tornado fleet with Boeing’s F-18 fighters.

Boeing’s German subsidiary said it contacted 10 local companies to support Super Hornet and Growler variants, which Germany said years ago it would likely acquire.

Boeing, not naming the possible local partners, said the outreach would worth around 3.5 billion euros.

The company statement came at a time when the new German government said it will conduct a series of examinations for the post-Tornado fleet. The government plans to retire the fleet in 2030.

The government announcement may bring forward key decisions such as a closer look at alternatives, including Lockheed Martin’s F-35 stealth fighter?

That's all from this edition of The Executive Perspective. Hope to see you again on Wednesday Jan 26th, 2022. Please feel free to comment or share as you wish.

Cheers.