Investing in picks and shovels
The 1848-1855 California Gold Rush attracted thousands of fortune seekers. While some found a few nuggets, many went away empty-handed, having lost a lot of money. However, pickaxe and shovel sellers did pretty well out of those caught up in the gold fever. Although this was a less enticing prospect than discovering a vein of gold, these traders made big profits.
Merchants do better than prospectors
Today we are in the midst of a 30-year transition towards decarbonising our economy, which makes “transition metals” look like a particularly attractive investment opportunity – as the sellers of picks and shovels of yesteryear did. Indeed, current investors are on the hunt for gold. i.e. the future market leaders in electric vehicles, battery manufacturing, wind energy, public electricity utilities or solar panels. But what all these sectors have in common is a huge need for transition metals, which could provide the real big wins of the move to decarbonisation.
Metals vital to the transition
One such essential metal is lithium, which is used in laptop batteries, smartphones and electric vehicles, as well as energy storage. Lithium is found in mines and in brine deposits and lithium-rich salts. Rare earth elements, such as neodymium, dysprosium and praseodymium, are used to make the permanent magnets needed for EVs and wind turbines. They can be found in small amounts all over the world, but China is the country that is most active in mining and refining them. Several companies based in North America and Australia are also major suppliers. Uranium, meanwhile, is increasingly being used as a replacement fuel for coal, fuel oil and natural gas in nuclear power plants. A number of the biggest uranium suppliers are in Canada. Copper will directly benefit from the increasing electrification, as it is needed for enhancing the electricity grid, wiring EVs and connecting wind turbines to the grid.
China plays an important role in refining and supplying these transition metals, but bedfore rushing in, investors must take into account the risks attached to investing in a country without fully reliable legal and economic structures. Countries with less government intervention and a more stable legal system are likely to be a better bet.
The recently passed US Inflation Reduction Act, which supports clean energy financing, as well as forthcoming EU regulations promoting the adoption of cleaner energy technologies, will increase demand for transition metals. As a result, investing in the ‘picks and shovels’ of the energy transition – which should continue over the next 30 years – may be the way to go.
Article published in Le Temps, 6 February, 2023
Investir dans les pelles et le pioches