The Fourth Industrial Revolution: Reshaping Global Energy Markets

August 26, 2024 | 11 mins 06 secs 

Sprott's Steve Schoffstall discusses how AI, robotics and quantum computing are integrating into the overall global economy and how these developments will reshape the global energy landscape. Learn about electricity production and technological innovation and how to invest in the opportunities they provide.

For the latest standardized performance of the Sprott Energy Transition ETFs, please visit the individual website pages: SETM, LITP, URNM, URNJ, COPP, COPJ and NIKL. Past performance is no guarantee of future results.

Video Transcript

Thalia Hayden: On today's episode of Shifting Energy, we'll discuss the Fourth Industrial Revolution and how it's reshaping global energy markets. The revolution also drives demand for critical materials buried deep beneath the Earth's surface. We'll reveal the identity of these materials and the ETFs tracking them. Stay with us.

I'm Thalia Hayden with ETF Guide. It's great to have you with us. Welcome to Shifting Energy, an original episode series that keeps you on top of big changes in the global energy transition. Throughout history, the world has gone through industrial revolutions, right? Now, we're in the midst of what some economists call a Fourth Industrial Revolution.

What is it? How is it different from previous industrial revolutions? What are the investment opportunities behind it? Helping us get to the bottom of all this is Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management. Steve, welcome to the program. It's great to see you again.

Steve Schoffstall: It's great to be back. Thank you.

Thalia Hayden: Today, we're talking about industrial revolutions, which have been a part of mankind's quest for prosperity and progress. We've seen this in fields like agriculture, communication, and transportation. Right now, we're in the midst of what some call a Fourth Industrial Revolution. What is it, and how is it different from previous industrial revolutions?

Steve Schoffstall: All industrial revolutions have one thing at their core, and we hope that's the advancement of society. This, in that sense, is no different. Looking at past industrial revolutions brought us from that more rural agrarian society into an urbanization setting. They were focused on productivity and increasing economic output. That led to large changes across societies and gave us a much more complex economic model as we had a period of globalization, particularly over the last 50 years.

The Fourth Industrial Revolution started about 20 years ago, and it's really focused on and benefiting from technological acceleration. This relates to things like AI, robotics, and quantum computing and how they're integrating into the overall economy. We're seeing that it's starting to reshape our global energy systems. It's all about electricity production and technological innovation and how those two come together.

Thalia Hayden: You touched on this, but sticking with it, what impacts may the Fourth Industrial Revolution have on electricity and infrastructure?

Steve Schoffstall: The first part is about renewable energy. At the start of the century, about 18% of our electricity came from renewable energy sources. The vast majority of that, upwards of 90-95%, came from hydroelectric. As we've gone through the last 25 years, we've started seeing things like wind and solar become much more prevalent.

When we reached the end of 2023, the renewable energy mix was now closer to 30%. When we look at the international energy agencies, estimates of where we expect renewable energy to fit in, just going out through 2028, are at about 42% of the grid. It's a very sizable change that we're seeing that's been happening now for the last 20 or 25 years or so. Because this free renewable energy is starting to come front and center, it's contingent on factors outside our control. If you think of wind and solar, they're very much impacted by environmental factors.

This means we must have reliable baseload power, preferably clean, to back up these systems. What we're starting to see now, both from public and private entities is a new reliance on and optimism for nuclear energy. We've come a long way in the nuclear space compared to just two or three years ago when we started to see an uptick in nuclear energy production.

Let's look at this from an energy system perspective and how renewable energy fits into that. We expect to see the departure from this centralized large power plant model and move more toward a decentralized system. What I mean by that is that we could expect to see much smaller renewable energy sources start to be built much closer to where the end use will be.

That also starts to bring new opportunities, particularly regarding grid battery storage. We started to think about lithium-ion batteries and how they can store energy generated. That may be because solar farms generate more energy than is used during the day. At nighttime, these battery storage systems can release that energy to the grid when the sun's not shining, and we need more capacity.

Another thing that people don't necessarily think of when they think of electricity production is the technology behind it. We're seeing an increase in smart grids, particularly as they start to rely on AI and what that can mean for electricity generation and transmission. With the emergence of AI, we can now see models that can manage that energy flow more efficiently than in the past, and we can see production and distribution get enhanced and more effectively managed throughout the energy supply chain.

Thalia Hayden: That makes sense. We know Sprott has become a leader in the critical material space over the last several years. Which critical materials are you most focused on now?

Steve Schoffstall: I'd say the two that we most hear about and are also a focus of ours are copper and uranium. When we look at those two, not only do they look to have significant roles in this Fourth Industrial Revolution, but also there's a lot of similarities between the two. Both were impacted by the decreased mining investment we saw through the 2010s. Both metals are expected to have significant supply shortages going out through 2040. There are a number of different reasons for that, but most of it is around increasing demand and difficulties in bringing new production online. We expect both to play a very important role in the rise of artificial intelligence and the energy transition.

If we were to look at copper for a moment, a structural demand would drive prices much higher than we've seen. Copper tends to be viewed as a barometer for the overall economic growth of the global economy and has a lot of relevance for people following the Chinese economy. If you look at how prices have trended since the beginning of the century, back in 2000, when China was going through its industrialization throughout the economy, we saw prices around $2,000 per ton. Today, we're up around $8,600 per ton. This incentivizes miners to start investing in their businesses, making their operations much more profitable.

The transition to cleaner energy is also very resource-intensive. So, suppose you look at what we're expecting to see from a copper demand perspective from about 2022 out through 2050, based on current demand projections. In that case, we expect the demand for copper to be about two times the amount of copper mined throughout human history.

Let's take a look at what's driving that. If we look at EVs and renewable energy just for a moment about 2.4 times the amount of copper needed in an EV relative to a gas-powered car. When we start looking at electricity generation, we start thinking about solar and wind, which are about two and a half times the amount of copper needed in those types of energy plants relative to a fossil fuel-powered plant.

When we start looking at the AI side of the equation, copper is used to wire all these computers and servers together. Given its properties, we increasingly rely on copper instead of other ways of transmitting electricity and data, such as fiber optics. One of the reasons we're seeing that is it's much easier and, much more cost-effective and a lot less energy-intensive for the firms that are running these data centers to cool the systems down if they're using copper. It does have that added benefit as it relates to the data centers.

Finally, when we start looking at the supply side, we're beginning to have structural issues catching up to us there. If you look at the amount of time it takes to get a new copper mine up and running, the industry is notorious for its long lead time, and it's not because of what the miners are doing solely. Getting a new mine from discovery to production could take about 16 and a half years. Along the way, we've seen that over the last 20 years or so, a lot of the easy material's been mined out.

What that means is that the existing mines aren't yielding to the same degree as they were previously. Miners are having to dig deeper or move further away from the infrastructure that's already in place. That's really driving the overall copper supply.

While we're on the topic, one quick minute on uranium: that's a spot that we've seen a lot of increased acceptance in nuclear power over the last 3 or 4 years. It's safe, reliable, and clean. Because of this, we saw just last December that over 20 nations signed on at the COP28 conference to triple their nuclear energy capacity out through 2050, and after that agreement was signed, the UK came out and said that they were going to quadruple their nuclear energy capacity.

A lot of times in America, I think one thing that we hear is, "We don't see a lot of new power plants being built here." A lot of what we see in the growth of nuclear energy is overseas. If you look at the 440 nuclear power plants we have up and running globally, the U.S. has the most power generation. Still, we do see another 152 that are already under construction or planned for construction, and a lot of that is coming through from China and restarts that we see in Japan are actually a story that we see developing where power plants that already exist are extending their life, or they're moving away from plans to shut down those plants because they do see that as a reliable clean energy alternative to some of the other less reliable sources like wind and solar out there.

Another aspect we're starting to see is that nuclear energy is increasingly being turned to as it relates to these data centers and AI. There's a great example here in Pennsylvania, where I'm from, where Amazon purchased a data center adjacent to a nuclear power plant to get nuclear power directly into the data center because their energy needs are that high.

This isn't just something specific to Amazon or this one location. We do see a lot of these data centers being built by firms like Microsoft, Meta and Amazon. These firms are looking for ways to bring renewables and even nuclear energy into their whole operations to supply that clean power. That's because these firms usually do have a clean energy mandate, and nuclear power is one way they can achieve that mandate.

Then, finally, on the supply side, as it relates to uranium, it's a very similar story that we see with copper where we don't expect to see any large projects that would fully satisfy the demand going out through 2040, which is where most projections take us to. If you were to look at cumulative deficit out through 2040, depending on your assumptions, the expectation is that we'll have a deficit of about £1 billion up to £2.1 billion. This is a significant hurdle to overcome as we move forward in this next iteration of our revolution.

Thalia Hayden: That sounds like it. Before we let you go, Steve, I have a final question. Sprott offers seven ETFs with focused exposure to critical materials. Can you tell us how they work?

Steve Schoffstall: They're quite straightforward. Our background with Sprott is in the metals and mining space, where we have several decades of experience. When we go through the product development processes, we take a look at the investment landscape. First, we try to identify emerging trends. Second, we look for gaps in what's already available to investors. When we do that, we can identify a pure play strategy.

These will be strategies where we're targeting firms that have at least 50% of their revenue or assets devoted to whichever commodity we target. If you look at uranium, for example, the pure play strategy would say that they must have at least 50% of their revenue or assets tied to the mining or production of uranium. That, in a nutshell, is really what we're looking to do, and what that does is it reduces that unwanted commodity exposure that you might get from investing in a diversified miner.

We offer several alternatives for investors interested in the critical material space. The first option is the Sprott Energy Transition Materials ETF, ticker SETM. This broad-based strategy is designed for investors who might understand the investment possibilities and their growth story but don't necessarily want to allocate to one metal over the other.

This is a pure-play strategy that invests in nine different critical materials. We also have more targeted approaches, two based on uranium. We have the Sprott Uranium Miners ETF, ticker URNM, and the Sprott Junior Uranium Miners ETF, ticker URNJ. URNJ will invest in small-cap miners, while URNM will invest in all-cap miners and also have about a 17-18% allocation to physical uranium.

We also have two ETFs available in the copper space. The Sprott Copper Miners ETF, ticker COPP, is followed by the Sprott Junior Copper Miners ETF, ticker COPJ. Rounding out our offering for single commodities would be the Sprott Nickel Miners ETF, ticker NIKL, and the Sprott Lithium Miners ETF, ticker LITP.

Thalia Hayden: Alright, Steve. Thank you so much for your timely insights and for updating us on what we need to know now. Keep up the great work.

Steve Schoffstall: Thanks for having me.

Thalia Hayden: To learn more about the critical materials and ETFs we discussed on today's program, be sure to visit sprottetfs.com. I'm Thalia Hayden with ETF Guide. Thanks for watching, and we'll see you next time.