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The transition of the global economy toward a clean energy model that reduces carbon emissions and helps to maintain sustainable environmental conditions provides ideal business openings for commodity traders, who are “poised to reap the benefits of the transition to a low-carbon economy,” PwC wrote in a report published on Thursday, January 13.
This showed how the emergence of energy transition commodity markets, including critical minerals and metals, may usurp the dominance of conventional hydrocarbons and thus create fresh opportunities for trade intermediaries to match supply with new demand.
But the scale of opportunities came with notable hazards, especially in reputational risk that traders see as a concern. This can emerge in several ways.
These include associating with partners that are perceived not be pulling their weight on reducing their own emissions, or that may be involved in environmentally-related malpractice; carrying out practices that may be perceived negatively in future when the public stance on what PwC calls “yet unknown and undeveloped societal standards” evolves; or from still-unclear sets of norms defining sustainable practices and environmentally sound commercial behavior.
With the requirements on Environmental and Social Governance (ESG) standards still being defined, and international standards on commonly agreed requirements not yet in place, there are widespread concerns that ESG is open to ‘greenwashing’ on the part of operators.
At the same time, PwC notes how an increasingly larger sum of capital is associated with, and deployed according to, ESG metrics, making these a factor that operators in the market must consider.
“Strong ESG credentials will be essential for trading entities when lending institutions deploy their capital,” the PwC analysts wrote, adding that traders are now considering ESG elements in their ‘know your customer’ assessment evaluation criteria. This is expected to become a widespread practice with a view to minimizing the potential risks to the trading houses, were they to be associated with a counterparty involved in environmentally damaging practices.
Additionally, risk could also arise from product composition and how that is communicated to investors. Traders interviewed by PwC spoke of “sometimes misleading nomenclature” associated with some products – in other words, greenwashing.
“For example, describing oil sold with bundled carbon credits or with a lower carbon intensity as ‘carbon neutral oil’ or ‘low carbon oil’, or in the case of gas ‘green LNG’, all ran the risk of misleading customers,” the report said.
In a case last year, US investment manager BlackRock drew widespread criticism when it was revealed that it held a large share in an Indonesian conglomerate that was active in palm oil production and was associated with illegal land grabs from local farmers. The company was accused of double standards and of not following through on its ESG pledges.
While the concerns are there, and the risks can be substantial for the industry, while it seeks to navigate a changing landscape of regulations, as well as societal perceptions, the scale of growth expected in the sector as a whole highlights how central the involvement will be to traders’ business strategies.
According to data from the International Energy Agency (IEA), the value of trade in critical minerals that are employed in clean energy and energy transition sectors is forecast to increase three-fold by 2050 in a net-zero energy emissions scenario.
Forecasts of long-term, large-scale demand growth for raw materials for batteries to power electric vehicles (EVs) are attracting existing and new market participants as well as investors into metal markets including cobalt, graphite, lithium and nickel.
Some of these markets have been under pressure over the past year while a new cycle of demand and bullish consumption outlooks, coupled with supply tightness, saw commodity prices soaring.
The price of lithium carbonate, used in some battery cathodes, increased more than five-fold during 2021.
Fastmarkets most recently assessed the price of lithium carbonate, 99.5% Li2CO3 min, battery grade, spot prices, cif China, Japan & Korea, at $42-45 per kg on January 17, up by more than 540% compared with one year earlier.
And the price of spherical graphite, used in battery anodes, has also increased significantly.
Fastmarkets’ latest assessment of the price for graphite, spherical, 99.95% C, 15 microns, fob China, was $3,100-3,300 per tonne on January 13, up by 24.27% from $2,350-2,800 per tonne on July 1, 2021.