The supply of green commodities, as well as demand for them, has been growing significantly over recent years, although volumes of these premium-priced materials remain limited. Numerous producers of metals, plastics, glass, and other materials have launched low CO2 or recovered and recycled offerings for which they have been charging “green premia.” In addition, information providers such as S&P Global Platts and Fastmarkets MB have defined criteria for green materials and introduced indexes that track green premia across various commodities. Long-term offtake contracts for green materials are also starting to emerge.
However, this growth has been facing headwinds since the second half of 2021. An uncertain macroeconomic outlook, high energy costs and interest rates, and declining carbon costs, among other factors, have spurred fears of slowing demand for green materials and delays in decarbonization projects.
What impact will these potential shifts have on green premia? To answer this question, we surveyed more than 100 buyers and suppliers of seven materials—steel, aluminum, copper, nickel, lithium, plastics, and glass—from around the world. Their responses suggest that, despite the challenges, the green momentum remains strong across commodities and regions.
Implications for commodities suppliers
Capitalizing on green materials to gain higher revenue and market share requires focused strategies, as green premia are unlikely to be effective in every market and customer segment. Materials suppliers should develop their approaches from demand backward across four dimensions:
- Reevaluate the business case for decarbonization and its pace. This should include an assessment of the need for subsidies and external financing, as premia may not be enough to cover the high capital and operating costs associated with decarbonization.
- Prioritize market segments and individual customers with the highest unmet demand, willingness to pay, and interest in offtake contracts, and address the demand in these segments with tailored offerings.
- Increase the transparency of operations and supply chains to prove the sustainability of your offerings by, for example, tracking and verifying emissions at a granular level, including Scope 3. Such a forward-looking approach can prepare you for potential future regulatory requirements.
- Secure the raw materials and energy supplies early to meet your decarbonization goals, as these supplies may become scarce. To do so, producers should develop and implement sourcing strategies for sustainable raw materials, energy, and technology.
Materials buyers who process and incorporate green materials into sustainable end products will likely face similar challenges to those faced by producers. They should collaborate with their suppliers and customers to decarbonize their offerings in an economically sound way.
Our experience suggests that sustainability remains a business imperative and should be a C-suite priority for materials producers and customers alike. The new survey supports this view. Despite macroeconomic headwinds, buyers’ demand for green materials is steady or growing, as is their willingness to pay premia to secure those commodities. However, producers should prepare for a likely tightening of standards in the definitions of green materials. Collaboration across value chains will be essential to ensure that businesses are both environmentally and economically sustainable.
