The world is heating up and with it, billions of dollars of investments are threatening to go up in smoke. Yet amid the global drive to decarbonise, could a new commodities “supercycle” turbocharge the resources sector?

The latest report by global climate scientists has increased pressure on governments to curb the use of fossil fuels.

The United Nations’ Intergovernmental Panel on Climate Change (IPCC) has called for “strong, rapid, and sustained reductions in greenhouse gas emissions” to prevent damaging climate change.

“We know what must be done to limit global warming – consign coal to history and shift to clean energy sources, protect nature and provide climate finance for countries on the frontline,” British Prime Minister Boris Johnson said.

The oil and gas industry is also under pressure to slash emissions. Santos chief executive Kevin Gallagher has called on the industry to “lead the charge on decarbonisation before we find ourselves in the same place as the coal industry”.

Carbon capture and storage and hydrogen are seen as key for petroleum companies in achieving carbon neutrality, as the industry scrambles to meet the demands of environmental-social-governance (ESG) investors.

Energy research and consultancy Wood Mackenzie has projected that US$50 trillion of investment will be needed over the next three decades to limit global warming to 1.5 degrees Celsius, requiring the electrification of society and metals supply.

“Another commodities supercycle is on the horizon, but it will be different from any that have come before," the group said in a July report. "Fossil fuels won’t be in the vanguard and the winners will be the industrial metals needed to electrify society - cobalt, lithium, copper, nickel and aluminium."

Wood Mackenzie projects cobalt demand will grow by 167 per cent, lithium by 130 per cent, copper by 85 per cent, nickel by 65 per cent and aluminium by 29 per cent through to 2030, under its 2-degree warming scenario.

Under this scenario, fossil fuels’ share of global energy demand would fall to 50 per cent by 2050, with the oil price slumping to below US$20 per barrel as electric vehicles become dominant.

Thermal coal demand is seen entering a “steep decline,” although gas would remain resilient “due to the deployment of blue hydrogen and opportunities from the large-scale development of carbon capture and storage and carbon capture, utilisation and storage in the industrial and power sectors,” it said.

Lithium boost

Morningstar Australia's director of equity research Mathew Hodge says there are some obvious winners from the decarbonisation drive.

“We have been pretty positive on lithium, which has a direct benefit from the growth of the lithium-ion battery sector,” he said.

“Some of the others are less direct, like copper and nickel, where it’s a relatively smaller part of total demand. China is still a big part of total demand for these metals and there are headwinds to future consumption, since it already has a good stock of infrastructure and housing relative to the developed world.”

Lithium miners have enjoyed a boost from US President Joe Biden, who on August 5 announced plans to make half of all new vehicles sold in the United States zero-emission by 2030. Biden’s pledge was backed up by US automakers Ford, General Motors and Chrysler’s parent Stellantis, who are collectively investing more than US$100 billion on EV development.

Morningstar senior equity analyst Seth Goldstein predicts electric vehicles (EVs) and hybrids will make up two of every three autos sold globally by 2030, with 30 per cent EVs. Lithium demand is expected to grow at over 20 per cent annual rate through to 2030, with a number of analysts projecting a sustained supply deficit.

In late July, ASX-listed Pilbara Minerals (ASX:PLS) reported receiving prices as high as US$1,250 for its spodumene (lithium) concentrate from Western Australia, compared to less than US$400 a year earlier. The price rise has spurred record share market highs for Pilbara and other lithium miners, amid renewed investor enthusiasm for the sector.

Counterintuitive plays

However, according to Hodge, it is not all bad news for the fossil fuel industry.

“It could be an interesting time for fossil fuels. We’ve had Whitehaven Coal (ASX:WHC) on our ‘best ideas’ list and we’ve got New Hope (ASX:NHC) being undervalued as well,” he said.

“There’s a two-tiered market opening up between producers of high quality and low quality coal. If you’re producing low quality coal, you’re in trouble, but high quality coal has been one of the best performing commodities this year.”

He also pointed to rail freight operator Aurizon (ASX:AZJ) as an “infrastructure play” which could benefit from surging demand for infrastructure assets, as seen with the bid for Sydney Airport (ASX:SYD). Aurizon also should benefit from continued demand for coking coal, since “a substitute for using coking coal to make steel is a long way off.”

Notably, despite its net-zero emissions by 2060 pledge, China currently has 96.7 gigawatts of coal-fired generation under construction, while India has 34.4 GW, among other new coal power investments in Asia.

Oil and gas companies could also suffer less damage from decarbonisation due to rising demand for “non-combusted” fuels used as feedstocks in petrochemicals, bitumen and fertilisers.

“Demand may be softer going forward, but if supply is constrained, then those companies with a long asset life can benefit since there won’t be as much money thrown into new projects to increase supply,” he said.

Australian investors seeking to capitalise on the decarbonisation theme could consider either direct equities or exchange-traded funds (ETFs) that cover a broad section of the sector.

Among the former, Morningstar considers German automaker BMW a beneficiary of the EV drive along with auto supplier BorgWarner (BWA) and lithium miner Sociedad Quimica Y Minera De Chile (SQM).

An old market adage suggests “the trend is your friend.” With a “paradigm shift” in demand signposted by the United Nations, it could be timely for investors to take heed.