Steel is leading the energy transition metals when it comes to consumer willingness to pay a green premium by 2030, according to a report by McKinsey & Company, seen by Kallanish.
The Global Materials Perspective 2024 reports that 42% of steel customers were ready to pay some extra premium to secure supply if green materials are in deficit by 2030, above that of aluminium (37%) and copper (20%) customers.
While 44% of steel customers were not ready to pay extra and would switch to a grey alternative, this remained a lower percentage than those in the aluminium (59%) and copper (60%) sectors.
Across all materials, less than 15% of customers indicate a willingness to pay premiums of around 10% for low-carbon materials. However, the research notes regulatory measures could change the outlook, such as the EU Emissions Trading System (EU ETS) and Carbon Border Adjustment Mechanism (CBAM), amid higher costs for carbon emissions.
It adds that the energy transition is changing the materials landscape by accelerating demand growth for materials that are utilised in low-carbon technology such as electric vehicles. A long-term shift is taking place in terms of the materials needed, increasing the importance of the metals and mining portfolio, while at the same time driving a reduction in the use of thermal coal in energy.
In response, companies might seek to either switch to sourcing low-carbon footprint materials or invest in innovative solutions to reduce process emissions.
Elsewhere, the report notes that in metals and mining, around 80% of revenues stem from just five materials, steel, thermal coal, copper, gold, and aluminium, accounting for $4 trillion.
Of this, thermal coal and steel account for approximately 60-70% of revenues, with production volumes more than 30 times higher than all other materials combined. Gold, copper, and aluminium make up another 15-20%.
However, despite the long-term shift in material choice, steel was one of the few materials that has a somewhat weaker growth expectation, with demand projections remaining strong until 2035. With the exception of steel and thermal coal, demand is expected to outpace absolute historical growth in the coming decade compared with the previous decade for all the other energy transition materials in the report, including lithium and nickel.
In 2023, total production emissions from the metals and mining industry accounted for approximately 15% of global emissions. Assuming no external shifts, the share is estimated to decrease to approximately 13% by 2035.
This decrease in emissions is driven by the net effect of several factors, according to the report. This includes changes in production of thermal coal, a 50% decarbonisation of the global power grid, as the share of renewable energy increases, improved circularity as more recycled material is collected and utilised, efficiency improvements, and assets transitioning to net zero production.
Steel was also looking at a more “modest” decrease in emissions from in a “business as usual” perspective over the coming years than other materials. However, the research notes for the sector, approximately 40 million tonnes capacity of such transitions have already been announced by 2035, which would lower global emissions by as much as 60mt of CO2.
Elsewhere, the report notes that despite a turbulent environment, finances were healthy until 2023 – yet 2024 has a gloomier outlook. The past two to three years have posed some challenges for the materials industry, with high price volatility driven by increased supply chain disruptions and volatility in energy prices, among other factors. While the industry has experienced previous cycles of boom and bust, these recent fluctuations are unprecedented in scale.
Despite the challenges, the materials industry has shown strong financial results over the past few years when compared with historical averages, with revenue growing by 6% per annum since 2000. Revenues grew by approximately $2.4 trillion (more than 40%) from 2020 to 2023, primarily driven by metals and mining, which grew by $1.7 trillion (an increase of approximately 75%). During the same period, Ebitda in metals and mining nearly doubled, increasing from $500 billion to $900 billion.
Overall, balance sheets are healthy, with net debt over Ebitda ratios of 1.3 times – well below the through-cycle average of 1.8 times – providing companies with more investment capacity.
It notes, however, that 2024 is projected to be a more challenging year for the industry as overall economic growth slows and the shift toward low-carbon technologies unfolds more slowly than expected. These factors are putting downward pressure on price levels, especially for battery materials.
Carrie Bone UK
