Listen: The Decisive | Episode 22 - Supply Chains for the Energy Transition

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Susan Minio  

Hello. I'm Susan Minio, Head of Strategic Engagement, and your host for today. We will discuss the vital connections between the energy transition and supply chains, two big drivers of the global economy.

I'm joined by my colleagues from S&P Global Market Intelligence: Jenny Paurys, Head of Global Intelligence and Analytics and Head of Supply Chain; Guy Sear, Head of Maritime; Jonathan Ablett, who runs our scenarios program; and Chris Rogers, Head of Supply Chain Research.

And with that, let's get started. Jenny, you've talked in the past about the dual role that supply chains play in energy transition. Can you talk us through that a little bit?

Jenny Paurys  

I think the way to think about this is that supply chains are both a critical conduit for achieving energy transition as well as direct players in their own energy transition. So if we think about the dichotomy of that, when we think about what is going to be required for energy transition in the coming decades, it will be supply chains that are transporting those elements that are going to power it, whether you're thinking about critical minerals, finished goods, you think about land, sea, et cetera. How those elements move across the world will be down to the functioning of supply chains. And then importantly, the other side of that is that in order to drive successful energy transition, supply chains are also direct players with their own emissions footprints upstream in their suppliers and downstream in the way that we engage with shipping and movement of goods, all the way from mining to delivery. So really, one of the biggest challenges for corporate decision-makers is managing that element and the types of emissions like Scope 3 emissions that come from it. Often, that accounts for the largest share of a carbon footprint in a supply chain. And so we are talking about this today because, really, enhanced visibility across supply chains is going to be key, not only in helping with compliance, but also in covering those opportunities for innovation and efficiency.

Susan Minio  

Jenny, what do you mean by enhanced visibility?

Jenny Paurys  

This is really about understanding your full supply chain, not just what you control, but what your suppliers and their suppliers and even further down the line bring to the table. And that's whether you're a direct participant in supply chains because of your role or really any other industry that is touched by supply chains. So over the last 5 years, we've seen a lot of events, whether we're talking about the pandemic or geopolitical tensions or commodity market crunches, that have illustrated the complexity of supply chains and the challenges of having a clear line of sight. Those challenges existed before, but now that we see how strong they drive complications and resiliency, we now know that we really need to think through every step in the supply chain, looking for those single points of failure, points of risk and obviously, points of opportunity. But really, it's in suppliers and beyond that that type of visibility is required. Some of the biggest risks in any supply chain are beyond the clear line of sight of supply chain operators. And that means suppliers several steps removed also introduce risk into supply chain resilience. And that might be about financial stability, business practices. And there's also many areas of policy that we see being developed and put into place across the world that are really aimed at requiring accountability for those kinds of risks.

Susan Minio  

That sounds like it would be a massive challenge for almost any company. Much of this is being driven by government regulations. Chris, where are we in terms of regulations and policy implementation?

Chris Rogers  

So I think as we head into 2025, we're actually at a quite important point of inflection for supply chains when it comes to the energy transition policies that are out there. And in fact, the policy environment is highly fragile. We've got around 70 elections this year. Obviously, we've got the U.S. elections. The European Union meanwhile, which has been very much a leader on environmental policy, has got the carbon border adjustment mechanism really kicking in next year. But the EU has just delayed their deforestation and corporate sustainability due diligence directives because of complexities and complaints from corporates, among others. So there is a lot of uncertainty there. I think we should also mention that China is pressing ahead both by supporting its manufacturing industry and implementing direct energy transition policies. Most recently, we're seeing the expansion of China's carbon permit trading scheme that will kick in from 2025 to include a wide range of products as well as including international firms. Companies don't necessarily mind what the policies are as long as they know what the policies are, it's the uncertainty that's difficult, and it's the uncertainty that holds back some of the investments that are really so important for ensuring that we actually get this energy transition done.

Susan Minio  

So it sounds like there's many potential impediments actually to keeping some of these policies going. Jenny, what do you think could actually help these policies move forward and stay in place?

Jenny Paurys  

Well, just as supply chain resiliency is balance sheet resiliency, it's also national security, right? And that's really a major shift we've seen in the past two to three years, especially, that governments across the world recognize that they have to participate in this place and driving that better resiliency because it does have economic implications. But if you really want to think about that at the root of it, that comes down to job creation, right, labor, and economic security. These areas are front and center in the way that governments are making decisions across the U.S., the EU, India, China, especially those elections that Chris was referring to a moment ago. This is a growing sector. It is a need that is not going to go away, that type of resiliency and the different levers that both governments and businesses are going to be pulling to push for that resiliency. No matter who wins an election, creating jobs, keeping employment top of mind and securing supply chains is going to be part of an outcome. Obviously, the policies that are instituted from that may be different. But the supply chain resiliency topic does not change depending on the outcome of an election as a base need for governments across the world to continue to tackle. A few statistics that I think are useful here. Clean energy employment accounted for more than half of the new jobs in the energy sector in August. And that is a 4.2% year-over-year growth in that area. That's more than double the economy's overall job rate growth, right, which also includes a rise in solar and in wind. These are places that investments are going in, in energy transition, in supply chains. And all of that is around supporting infrastructure that has to be built. That's where we come back to the jobs and the economic security. Think about manufacturing batteries for vehicles and energy storage as well as solar panels. There are also, like I said, those long-term security aspects. We really see in our research that economic security policy is increasingly intwined with that national security policy. And we don't foresee that changing depending on the outcome of the election.

Susan Minio  

That wider policy stance is a really very good reminder for all of us that the international aspects of that green energy supply and energy supply chains. Let's turn to Guy. Guy, let's talk about the movement of goods. What developments and motivations are we seeing in terms of the greening of international logistics?

Guy Sear  

It's widely recognized that over 80% of goods are moved around the world by sea, by volume. So that makes seaborne supply chains, one of the world's biggest Scope 3 contributors. To put it into perspective, the output of the shipping industry is equivalent in greenhouse gas volumes to the same output as an industrialized nation, the size and scale of Germany. So there's a big impact there that has a big opportunity for improvements and for upside. But the path to finding carbon-free shipping isn't a simple one. There are many options. And as an industry, there's not a single option that has been centered around yet. If we look at some of the options out there, we've got LNG, we've got green methanol. We've got ammonia as some of the opportunities.

If we look through those, an obvious leader would be in terms of LNG, which is 25% less CO2 emissions than traditional bunker fuels. However, LNG is still a very small part of the global fleet and a very small part of the new builds. Some other options would be green ammonia and methanol. Both of these are byproducts and chemicals from renewable energy sources, which is good. We've also got batteries that are being seen on some short sea routes such as ferries in Scandinavia. However, due to the size and energy density of batteries, batteries are not really viable alternatives for deep sea travel. So if we look at the methanol and ammonia, methanol has seen faster progress in terms of a zero carbon fuel. And as of sort of late 2023, we've already got one methanol-powered ship in the market. And between 2025 and 2027, we're seeing a number of container lines expecting deliveries of more methanol-powered ships on the horizon. Currently, there are no existing ships being delivered or on order that are suitable for ammonia. So overall, we can see that there are opportunities for major reductions in Scope 3 and greenhouse gas emissions. From the technology point of view from the vessel themselves, but also there's large opportunities that come from the operational side of it. In terms of port calls and port operations, being able to smooth through port operations with more digitized turnaround with just-in-time arrivals, actually, those mechanisms, even with existing fossil fuel vessels and traditional bunker fuels can produce huge impacts upon the CO2 and the greenhouse gas emissions created today. There's great opportunities on the horizon, but with the inflection of large geopolitical or even smaller local geopolitical events can have a big impact upon those opportunities.

Susan Minio  

Thank you, Guy. So ocean carriers aren't the only form of transportation working towards sustainability goals. Chris, can we talk a little bit about the decarbonization of ground transportation?

Chris Rogers  

Yes, of course. I think electric vehicles and other clean fuel vehicles are very much seen as being at the very center of the energy transition. But actually, there's two broad elements to the supply chain to think about, right? One is the vehicles themselves. And it's all pretty obvious what the trends and the requirements are. What's less obvious is how you actually get them to move, right? And you have to split by motive force, comparing electric vehicles to the green fueled traditional combustion systems. For the green fuels, so here, we're talking about ethanol-based fuels, particularly, technologically very easy, rollout of existing infrastructure is already there, but there's big food security issues in most countries where those are being put into place. Hydrogen, as a fuel source of vehicles, also very interesting, and we are starting to see that being used for commercial vehicles. However, the production of properly green hydrogen is far from simple and distribution is a huge challenge as well. For EVs, obviously, the challenge is around the charging infrastructure and getting that installed. And part of that is because it's very expensive to put the grid infrastructure in place, particularly to reinforce the power grid as well, particularly at the distribution level. That's why we're seeing more interest in hybrids. Hybrid vehicles effectively square the circle. Our analysis shows that Chinese exports of hybrids are picking up quite quickly now – not yet to the same level that we saw with electric vehicles in 2023, but they're getting there. And so we talked earlier a little bit about policy. We do see protectionism tied up with the energy transition supply chain. So we'd be a little bit concerned about the risks there. We always look at cars as being central to the energy transition, but actually, trucks and buses are proving to be really important areas of adoption within the energy transition as well. As we look out on the horizon, we would expect to see even more adoption in the commercial vehicle fleet for electric in the near field and then for longer journeys, potentially use of hydrogen as well.

Susan Minio  

Interesting almost parallel developments, right? So somebody has to make all the things that we're now moving by ship, moving by car, by bus, by truck. So Chris, who are the leaders? And what might change really in the future?

Chris Rogers  

So as Jenny mentioned, we are seeing a generational shift in some of these key supply chains, particularly on the manufacturing side. And that's led a lot of forward-thinking governments, particularly in China, to start building an early lead in constructing complete supply chains. It's not enough to just get into the assembly component, but also to produce all of the materials as well. Our data shows that China's share in a lot of these sectors has been picking up quite rapidly. Its share of global solar power equipment exports reached 50% in the second quarter of 2024. In electric vehicles, it reached 25%, wind turbines, 22%. That, in turn, has triggered this range of protectionist policies that we've referred to already, particularly amongst some of the later movers, notably in the U.S. and also to a certain extent in the EU. But I would also note that the U.S. and Europe are not the only client markets when it comes to energy transition goods. We're seeing rapid growth in demand in India and across Asia more broadly. And those countries as well are looking for domestic manufacturing requirements. One of the advantages countries can bring in developing their own base is their own domestic market. So we've seen that particularly in the case of China, where they've been able to build out a domestic demand base as well as the domestic manufacturing. One of the challenges for the developed markets, particularly the EU and the U.S., is that having ceded the lead, what we're seeing is that the private sector firms in those countries who've got a quarterly profit motive have actually been slowing some of their investments. So if you think about the EV companies, particularly amongst the Detroit Big 3, scaling back EVs, looking instead at hybrids. Governments can struggle to deal with this. If we look at the use of tariffs to try and bring solar manufacturing back to the United States, what we see there is that Chinese manufacturers effectively move their assembly from one country to another in order to try and optimize their cost basis. Looking ahead, we're going to see governments invest more to support their domestic industries, most notably, obviously, in the U.S. and the EU, the U.S. using the Inflation Reduction Act. In any event, what we're also seeing is companies start to set up manufacturing in the target markets, particularly Chinese firms setting up in Europe, for example, in reaction to the tariffs have just been put in place. But again, assembly is just fine, but Europe and the U.S., they want the full supply chain, not just the components. And going all the way upstream, obviously, that means securing the materials as well.

Susan Minio  

Speaking of securing those materials, let's now take this all the way back to the source. By that, I mean really looking at critical minerals, which are needed to power energy transition. Jonathan, what are the big drivers of the development of critical mineral resources?

Jonathan Ablett  

So we're in a really interesting time in terms of the picture for the development of critical minerals, right? As Chris alluded to, we're sort of experiencing this softness in demand with the Big 3 rolling back on some of their production of EV materials. On the other hand, when we look at the long term, when you look at lithium, you're talking tripling of demand over the next five years, you're talking 40% increases by some of the sort of more conservative forecasts for other critical minerals such as cobalt, rare-earth minerals, graphite and so on, right? So how do you make the leap from uncertain demand today to a real outsized expansion over the next five years. And that's the big struggle. And there are a couple of challenges, right? One is these are new markets, right? The market for lithium, for cobalt, for rare earth minerals are tiny and they are illiquid. So they aren't traded on exchanges the way sort of more traditional metals are. The second is, while mining activity is concentrated in a few countries, refining is even more concentrated. So you see China, to Chris' point about supply chains, they've assembled between 65% and 95% of the minerals we were just talking about in terms of the refining capacity globally. Unlocking the mineral development will involve unlocking refining capacity globally. And I think the third thing is, for practical purposes, there are very few big purchasers of these minerals at this point. It is very concentrated. So that again contributes to the opacity of the market, where four or five big players in the demand for any one of these minerals can lock up the demand with four or five big producers, right, all located in China. So it makes it even trickier to understand where demand is coming from and where it should be going. So if you're outside China, this is a big deal. You don't understand what the real prices that you're paying for or the real costs are. So that, as we've alluded to earlier, that is starting to lead to questions about how do we build those supply chains outside of China, right? There are some good pieces of news here, right? One is these minerals are not just in China. They are all around the world, the U.S., Canada, Chile, Argentina, Russia, Europe that we find it all over the world. It is a matter of expanding the capacity in those mines or the existence of those mines and connecting them to markets. That's the first thing. The second thing is what are we going to be doing to build that refining capacity, and that's where public policy will start to play a bigger and bigger role, I believe. The second thing, and this is where it starts to intersect with some of the more, if you will, national industrial policies that are emerging, right? It is the promotion of reshoring. In order to develop the capacity outside of China, you need demand signals for those minerals coming from outside of China. And so you're starting to see the intersection of interests between reshoring and the need for critical minerals and national security. And the third thing, which is a complete wildcard, is battery technology is not energy dense yet. So as that technology evolves, the demand patterns for lithium, for cobalt, et cetera, are changing. The quantities could change dramatically. You're looking at new technologies that are being developed in universities, in academia right now that could be commercialized within 5 years that would completely change this picture. So it's another level of uncertainty and reason for optimism.

Susan Minio  

So Jonathan, you've talked a little bit about where we find these minerals, and So I do have to ask a big question. I'm actually going to turn to our maritime expert to do this. Guy, where is the next frontier for critical minerals?

Guy Sear  

As Jonathan alluded to earlier, there are many places around the world where we've got traditional mining and refinery options for these minerals. But with that, with those extractions on land, we're seeing the grades of the ores continue to go down in terms of what's available. If we're looking at really what's on the horizon, one area of potential positivity and equal balance potential worry, is the bed mineral extraction of polymetallic rocks. So what that is, is across large swathes of the ocean floor, there are nuggets in effect of battery-ready metallic elements that could be collected. Now as I said, these are available, large swathes of the Indian ocean, large swathes of the Pacific Ocean, outside national boundaries. If we look at the methods of harvesting these, they're low carbon, low-intensity mineral extraction methods. However, the impact isn't yet known. As we extract those, what impact will it have on the marine ecosystems, which is one of the major food fueling sources for the world and also carbon sequestration? The oceans are not just a heat sink, but a huge carbon sink as well. And if we disturb the seabed, which is the sequestration and the carbon capture element within the seabed, how will that impact the water column? Will that be released? What do we see that looking like? Now we're seeing these schemes and these applications and licenses on very large scales. If you look at Norway, for example, they have inside their territorial waters already approved over 250 square kilometers of seabed for mining and potentially extraction with this. But that's in their own territorial waters. What we're seeing with countries such as India, China, Russia is the lodging of large-scale applications for seabed mining with the International Seabed Authority in international waters. So outside of their territorial purview and outside of necessarily their own legislation and their own remit. With this, India has put in place one of the largest applications that would see a leapfrog right up the scale and right up the leaderboard in terms of mineral extraction, not just from seabeds, but globally as well and be up there almost in the top 3, with Russia and China in terms of the volume produced each year.

Susan Minio  

Jenny, we've talked a lot about trends and drivers. We've even gone into deep sea mining. But really, what are some of the more practical things that companies can do to ensure that supply chain success as they take part in energy transition, the inevitable energy transition?

Jenny Paurys  

Well, that depends a lot on where in the supply chain you are and you operate, right? So upstream players, especially in the minerals space, and we heard this from Jonathan a few minutes ago, they need to balance short-term fluctuations in commodity markets versus long-term development and policy plans. And critical minerals obviously have seen that type of volatility as well. In the meantime, companies need to put in place a mixture of decision-making and intelligence tracking tools. Downstream players, particularly in manufacturing, need to invest more in supply chain visibility. It is a competitive market, so, you know, watching for those kind of rapid changes in regulatory and market conditions while simultaneously ensuring the trade and regulation adherence is a complex task. The truth of the matter is that the need for supply chain resilience and the need for massive shifts across the world like energy transition: These two things are completely intertwined. Our research and our discussions with customers honestly show too few examples of where firms have been able to sort all these things out. That makes sense. There's a lot of different aspects to this and a lot of different variables that both intersect and, at times, certainly impact one another. So, from a practical perspective, building a supply chain control tower with the data inputs that best help that twin challenge of monitoring and really optimizing current supply chain operations while also allowing some agility to shift those in response to regulatory or market pressures. That is key. And that is really at the heart of what our research and what we hear from clients that comes back to again and again, that supply chain control tower concept.

Susan Minio  

Very interesting. And obviously, there's a lot more that we can unpack on this topic, which we'll come back to and revisit, I'm sure. That's all the time we have to talk about this topic today. I'd like to thank all of the experts who weighed in on this topic. Thank you.