The potential of the green-premium value from sustainable materials

The potential of the green-premium value from sustainable materials

INTRODUCTION

It is being explored that materials are the next net-zero border. To harness the opportunity, green-materials producers and buyers must act now. Materials value chains comprise metals and mining, building materials, plastics, and packaging which form about 20 percent of global greenhouse gas (GHG) emissions. Some of these value chains are mostly wasteful: 98 percent of construction materials finish in low-value end-of-life usages, and just 17 percent of annual maiden plastics are recycled. Industry leaders are stressing as climate goal for net-zero GHG emissions by 2050 which signifies materials companies have left 30 years to renovate a manufacturing and energy landscape that achieved above a century to evolve. The purpose needs to raise annual expenses on physical assets across sectors by 60 percent (from an estimated annual $5.7 trillion to $9.2 trillion).

This is not only a supply-side encounter but also demand for low-CO2—or “green”—products are storming up as end customers, manufacturers, and governments drive for amplified sustainability and circularity. Primary materials processing makes up the majority of GHG emissions for many industrial products, which has led to increased attention on decarbonizing core contributive commodities. In sequence, time-bound green premiums are emergent for certain commodities, hinging on supply-side elasticity and cost. Understanding where green premiums exist today and where they will emerge over the short or medium term can help material players capture economic benefits for sellers and secure supplies of low-CO2 products for buyers. Although our prime focus is on the CO2 intensity of these commodities, given its impact on emissions reduction targets, other dimensions are increasingly important for both producers and purchasers, including water consumption and the impact on local communities and biodiversity, as indicative.

A critical analysis of green premiums

 Steel, aluminum, copper, and plastics form the major portion of industry materials demand. Some of these commodities also have substantial carbon footprints. Green premiums are evolving for several commodities and factors such as pressure from inflation and the cost-of-living crisis will progressively profile the balance between supply and demand. For example, in the past decade, high-quality recycled plastics reached an average premium of up to 60 percent over virgin plastics, dependent on the product. Regarding low-CO2 steel, premiums could also be important by 2030. However, this is not a one-size-fits-all story. Green premiums depend on the supply-demand balance since they require a lower supply of green materials than demand. That said, the space of occasion to seize gains during the transition to green materials is quickly closing. Incumbents are raging up the supply of green materials, new competitors in the space are emerging, and forward-thinking customers are starting to catch in long-term green-supply agreements.

THREE PROTOTYPES FOR SUPPLY-DEMAND BALANCE

Green commodities alter in their ways to decarbonization, their supply-and-demand market views, and any subsequent green premiums (or lack thereof). In addition, vagueness happens in how players use the terms “low CO2” or “green” regarding the carbon footprint thresholds for their respective products (“Modeling low-CO2 demand, supply, and premiums”). However, three archetypes of supply-demand balance and their respective pricing dynamics show how workable materials are likely to affect the supply and demand of changed materials.

Structural undersupply of low-CO2 materials

Commodities like steel and plastics face low-CO2-supply scarcities, which are hard to determine by bringing additional green capacity online and leading to green premiums. Steel: The European market for low-CO2 flat steel is projected to remain short until 2030 because of rapidly growing demand and long lead times to bring green assets online, leading to significant premiums from 2025 to 2030.

Modeling low-CO₂ demand, supply, and premiums

To indorse circularity and reduce emissions, some steel consumers have set ambitious end-to-end value-chain decarbonization targets (for example, up to 100 percent decarbonized for automotive OEMs by 20303 and up to 50 percent decarbonized for construction players4 ) and recycled-content targets (40 to 80 percent by 2030 for some OEMs). Accordingly, demand for low-CO2 steel is expected to surge from around 84 million tons in 2021 to nearly 200 million tons in 2030, mainly driven by automotive and construction demand in Europe and China. In response, European steel producers have announced intentions to open low-CO2 steel factories and replace existing assets with green assets, most of which will produce flat steel. That said, the speed of the transition depends not only on the adoption of electric arc furnaces (EAFs) and customers’ commitments but also on the prices and availability of natural gas, green-hydrogen production at scale, equipment from technology providers, and of raw materials of sufficiently high quality, among other factors.

Considering, the increased supply is projected across both flat and long steel in Europe: In flat steel, emerging leanings find that the market for low-CO2 steel (less than 0.6 tons of CO2 per ton) will be short supply until 2030. Specifically, the total supply is estimated around 25 million metric tons, while there will be demand for 39 million metric tons of low-CO2 flat steel. The reasons for the scarcity are twice:  first, below 5 percent of the steel produced in Europe is currently green; and second, steelmaking plants require significant capital investments to shift from carbon-intensive blast furnace–basic oxygen furnace (BF-BOF) technology to environmentally friendlier BF-BOF grouping carbon capture, utilization, and storage (CCUS) or direct reduced iron (DRI) in combination with EAF or smelter technologies. Green-premium levels will depend on the transition scenario and market tightness. In our base-case scenario, we expect significant green premiums to emerge by the mid-2020s, increase further when hydrogen DRI plants come online after 2025, then slowly reduce as added capacity becomes online. These premiums result from the production-cost differential of low-CO2 steel and the supply-demand balance. Besides, certain segments (end industries or ultralow products) could capture even higher premiums because of specific quality supplies. In long steel, low-CO2, scrap-based supply is anticipated to be enough to fulfill demand, with only identified specialized products possibly catching a green premium.

Finally, steel premiums will depend on the region. Europe to be taken as an example, where flat steel has factually been produced using BF-BOF, processes will need to go through expensive transitions to lower emissions. Thus, the pressure to decarbonize is knowingly reduced in regions where steel has historically been produced in EAFs, such as North America. Plastics: The market for high-quality recycled plastics is expected to remain scarce until 2030 and beyond because of rapidly growing demand and limitations in proper collection and sorting infrastructure, leading to significant premiums, depending on the plastic grade. The sustainability of plastics is centered almost entirely on recycling and circularity, with emissions reduction also important and addressed by recycling. Plastic consumers often regulate recycled-content targets, and governments across the world are executing regulations that require increases in recycling or that ban single-use plastics. Plastic recycling rates are currently low—just 17 percent, or 30 million tons, of plastics, enter a circular economy, of which only 20 million tons are recycled—but they are likely to raise above 100 million tons in 2030. This scenario, however, is diverse between high-quality recycled plastics (plastics recycled to a similar product grade) and low-quality recycled plastics (plastics recycled to lower-quality grades): In high-quality recycled plastics, supply could grow from around five million tons to around 20 to 30 million tons by 2030. This increased supply still lags significantly behind demand from applications such as packaging, consumer electronics, and automotive, which is expected to grow from 11 million tons in 2020 to 66 million tons in 2030. The supply-demand disparity for high-quality recycled plastics is thus expected to reach more than 35 to 45 million tons by 2030, leading to the potential for high premiums. These high premiums are already observed for several plastics categories. For instance, from 2010 to 2022, there have been premiums of more than 60 percent for natural recycled high-density polyethylene (HDPE) and premiums of more than 10 percent for high-intrinsic-viscosity recycled polyethylene terephthalate (high IV PET). These premiums will likely remain high until 2030 and beyond. Plastic recycling is top of mind for FMCG companies and, progressively, for OEMs of durable products, making them more willing to pay for recycled products. Consequently, the race for recycled materials and biomaterials is in full swing through acquisitions and partnerships, with access to feedstock a top priority, since many plastics players have already announced plans to further expand recycling capacity. Moreover, because the imperative for sustainable products is primarily driven by consumers, producers are expected to continue to react to high green premiums with additional supply beyond what is currently captured in the scenarios.

 In low-quality recycled plastics, supply is expected to surge from 21 million tons in 2020 to 39 million tons in 2030. This will be enough to meet growing demand in the period, which is expected to increase from ten million tons in 2020 to 26 million tons in 2030. Thus, only specialized products can potentially capture a green premium, as illustrated by downcycled polymers being historically traded at lower prices than virgin polymers, as in the 10 to 15 percent discount on both mixed-color recycled polyethylene (rPE) and low IV rPET. Considering the public interest in sustainable plastics, government connections and guidelines will significantly define the speed of scaling recycling capabilities. The European Union, for example, has set targets to develop its circular economy. Additionally, the quality of plastic waste and the speed of implementing advanced sorting and recycling technologies can significantly impact the split between high- and low-quality recycled plastics, further influencing supply-demand balances.

Growing demand and supply of low-CO2 materials

 Commodities such as aluminum show high momentum around low-CO2 materials. Moreover, the supply of these commodities can rapidly adjust to meet demand, leading to limited or no green premiums, except for ultralow-CO2 grades or specific subsegments.

Aluminum: The green (low-CO2 and secondary) aluminum market is expected to stay balanced by 2030, leading to limited premiums. That said, ultralow-CO2 aluminum requires technological changes and is thus expected to be scarce by 2030, reaching significantly higher premiums. Like steel, aluminum faces increasing pressure from OEMs with action-oriented climate targets. Green-aluminum supply, which covers low-CO2 (less than four tons of CO2 per ton) and secondary aluminum, is expected to grow from 44 million tons to 71 million tons from 2021 to 2030, driven by smelters switching to renewable energy, higher recycling rates, and technological developments (including regulations and customer recycling programs). On the demand side, demand for green aluminum is expected to increase aggressively from 26 million tons in 2021 to 62 million tons by 2030, mainly driven by automotive and packaging demand in Europe and China. The green-aluminum market will thus remain balanced or see insignificant excess. However, demand could emerge for ultralow-CO2 aluminum grades (less than 0.5 tons of CO2 per ton of aluminum from the electrolysis process, or five million tons of demand by 2030), driven by the luxury-automotive and energy sectors. This means that pushing beyond rates of less than four tons of CO2 per ton of aluminum is the next frontier, requiring advances and significant investments in technologies, such as inert anodes, to enable the required increase in capacity. Consequently, premiums for green aluminum are expected to be limited, while premiums for ultralow-CO2 aluminum could be significant. Moreover, since electricity accounts for above 70 percent of the CO2 emissions for aluminum, the growth of the green-aluminum supply is primarily associated with the readiness of renewable power, which is also a prerequisite for zero-carbon technologies.

The constricted overall market, to be balanced to packed low-CO2-materials market

Commodities such as low-CO2 copper will face a balanced or oversupplied market, although the overall copper market could be undersupplied. In such situations, prices are typically driven by overall demand, independent of CO2 emissions, leading to average, market-wise trends showing little or no green premiums. Despite this, a premium for ultralow-CO2 grades or specific subsegments could still emerge.

Uncertainties around future estimates

Copper: The low-CO2 copper market is expected to be balanced or oversupplied by 2030 as supply increases with grid decarbonization and demand for low-CO2 grades lags, leading to small premiums. There is more opportunity for premiums for ultralow-CO2 copper and selected subsegments. Now, the copper sector is incentivized to decarbonize because of increased regulations and highly motivated purchasers, such as electrical and electronics players. Other reasons include emissions-reduction targets, often through partnerships, such as Schneider Electric’s partnership with Rio Tinto to source green copper and aluminum. However, copper classically makes up a small share of the overall cost and Scope 3 emissions for most end products, leading to less interest in its potential for emissions decline. For example, copper backs only 2 percent of the materials emissions of a typical electric vehicle in 2021, compared with 29 percent for aluminum, 21 percent for steel, and 8 percent for plastics.

Low-CO2copper (less than 1.5 tons of CO2 per ton) supply is expected to grow from two million tons in 2020 (around 8 percent of global supply) to three million to four million tons in 2030 (around 13 percent of global supply) because of increased electrification of mining operations and decarbonized electric grids. Meanwhile, low-CO2 copper demand is expected to grow from nearly zero in 2021 to two million to three million tons in 2030 (around 8 percent of global demand). This is primarily driven by the energy, appliances, and automotive sectors, particularly in Europe. That said, the overall copper market is structurally undersupplied. Demand growth is expected to outpace supply through 2030, driven by an increasing need for copper in modern applications, such as batteries and energy infrastructure, and by a slow project development pipeline. Thus, copper purchasers will likely focus on accessing copper, irrespective of its carbon intensity. Therefore, there could be little incentive for purchasers of low-CO2 copper to pay additional premiums. In that regard, the decarbonization pathway (via grid decarbonization rather than process changes) and premium potential (most likely for select ultralow-CO2 grades for specific applications, such as luxury automotive) will probably be more similar to the pathway for aluminum rather than steel or plastics.

DELINEATE A ROAD AHEAD

Across different value chains, players will need to lay a foundation for transparency about carbon emissions, including baselining and benchmarking against peers, implementing carbon-accounting tools, and implanting internal carbon prices in decisions.

Discover the Sustainable Materials Hub

Charting the path forward will require materials producers to focus on operational decarbonization, including circularity, green commercial excellence, associated capability building, and green innovation. Oppositely, materials buyers will need to focus on value-chain decarbonization, procurement, and operational excellence, including securing sustainable supply early on, potentially through closed-loop agreements and product design or redesign for sustainability.

Implications for producers

The window for capturing green premiums can quickly close. Once producers assess their footprint and develop their road maps, leaders should rapidly implement capability building across groups and business units, including operational, commercial, and R&D functions. Endorsements include the following:

Develop carbon value-chain scenarios: green production and decarbonization decisions should rely on well-grounded estimates of upstream and downstream value-chain decarbonization scenarios. If not already completed, leaders should begin their journeys toward capturing green premiums by baselining their Scopes 1, 2, and 3 emissions, as well as building marginal abatement cost curves (MACCs) across all corporate levels, from group to plant, and per individual commodity and product line, where applicable. Associated with these efforts, companies should develop scenarios for future green demand, supply, and premiums.

launch operational decarbonization: Materials producers should go about operational decarbonization in an impact-oriented, cost-efficient way. For example, gray-aluminum producers should switch their production to green aluminum to continue supplying automotive, packaging, and select construction segments. Understanding the abatement levers at the disposal of individual assets—and their respective costs—is crucial. In many cases, net-present-value-positive impact levers can be the first step in reducing carbon footprints. In aluminum, for example, given the MACCs and decarbonization levers available to the industry, switching from coal to renewable energy is an efficient decarbonization path, since it abates 80 percent of production-related emissions.

 Be agile in the face of uncertainty: Materials producers operate in sectors across geographies, commodities, and customer bases, which means that variations meet segregated methods. Producers should therefore develop granular plans when the outlook is clear. Conversely, where there is uncertainty or path dependency, these plans should maintain a high-level view that embraces flexibility and modularity. On this point, materials producers should pay particular attention to timing any changes to their operations and build flexibility to meet sustainable demand at the pace of their customers. Important points to focus on includes identifying so-called cause points to act, such as changes in regulation or customer commitments, and building flexibility into the investment strategy to allow throttle control as change speeds up or stalls. For example, they should closely follow leading indicators of standards, such as the Aluminum Stewardship Initiative (ASI) standard for green aluminum.

Aim for green commercial excellence: Leaders should upgrade green commercial excellence, including customer segmentation based on disposition to pay for green premiums and Environmental Product Declarations (EPDs) or life cycle assessments (LCA). They can also provide green-materials certificates to marketing and sales teams based on the carbon profiles and build capabilities of carbon-related products.

Develop green innovation: The next level of decarbonization—meeting ultralow-CO2 demand—will require disruptive technologies. To prevail over the curve, materials producers should bestow time and resources on innovation. There are multiple methods for this, such as launching ambitious R&D initiatives internally, partnering with actors across the value chain or players that complement their technology base or even taking advantage of the start-up ecosystem to identify and secure new technologies early. The preferred approach will depend on the company and the commodity. For instance, significant investments associated with step changes should be expected in commodities in which a process change is needed to decarbonize, such as steel and plastics. In contrast, smaller investments and a more incremental approach can be undertaken in aluminum and copper, for which grid decarbonization drives product decarbonization.

 Implications for purchasers

Most operational and commercial best practices also apply to purchasers, including incorporating green materials into product marketing and operational decarbonization. That said, recommendations for purchasers include the following:

Aim for green-procurement excellence: Leaders should know the unique supply landscape for each low-CO2 commodity, based on purchase agreements and current emissions levels. Having the information, they can insert CO2 and other environmental, social, and governance (ESG) factors into procurement decision-making processes, including defining potential tradeoffs between price and carbon intensity. From there, they can also evaluate partnerships across the broader ecosystem of purchasers—for example, GM and GE recently partnered on magnet procurement in the United States. In addition, companies can work to develop novel sourcing strategies to lock in the supply of green materials at the required grades and carbon profiles, such as partnering with raw materials providers to lock in volumes, engaging with producers in earlier stages of development of projects, and use to optimal advantage the order book to incentivize production. Finally, moves should be taken to start a procurement transformation that focuses on both cost and carbon reduction.

Embrace circularity: Considering the above operational levers, downstream purchasers of low-CO2 materials should consider taking a circular approach for critical materials. For example, Coca-Cola has recently prioritized recycling schemes for its packaging, with the goals of making 100 percent of its packaging recyclable globally by 2025 and of using at least 50 percent recycled material in its packaging by 2030.

Innovate on product design and materials usage: Materials purchasers will require innovation on several fronts to decarbonize their products. Besides executing new procurement models, materials purchasers should focus on developing new products and reshaping existing components to allow customers to use or replace certain high carbon-intensive materials less often. One multinational technology company has already committed to 100 percent carbon neutrality in its supply chain and products by 2030, which it plans to achieve by using low-CO2 product design (increasing the use of low-CO2 and recycled materials in its products, innovating in product recycling, and designing products to be as energy efficient as possible), among other methods. This may also lead to a different set of customized for suppliers, such as for different materials or alloys; purchasers should therefore work closely with suppliers when establishing new requirements. Ensuing, the value from green premiums will be accrued by those who make quick and bold decisions.

CONCLUSION

The world is quickly decarbonizing and the critical window for materials producers and purchasers is rapidly closing. In the coming years, the value from green premiums will be accrued by those who make quick and bold decisions. An understanding of how and when these green premiums will emerge, as well as how the suggestions of a green-materials strategy will affect the business, can make the difference between leaders and stragglers.