Christian Hoffmann, Michel Van Hoey and Oleksandr Kravchenko*
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 decarbonisation 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, aluminium, 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.
Respondents report strong recent demand and premia for green materials
More than 90% of respondents, both buyers and sellers, report stable or growing demand for green materials over the past 12 months, with results largely consistent across regions and materials categories. More than 80% of respondents also observe stable or even increased green premia over that time.
By 2030, demand for green materials could increase by up to 4.5 times
While the volume of green commodities remains relatively small survey respondents have embraced sustainable offerings. The current share of green materials in respondents’ purchases ranges from 9% and 12% for battery-grade lithium and nickel, respectively, to 23% for plastics.
By 2030 the buyers we surveyed expect their demand for green materials to increase by between 1.7 and 4.5-times current levels, depending on the commodity, suggesting that they remain committed to decarbonisation in the medium to long term. This projected increase is fuelled by companies’ commitments to reducing Scope 3 emissions as well as rising demand from their end users. As a result we expect green materials’ share of total purchases to range from approximately one-quarter for copper to more than 40% for steel, plastics, and battery materials. Buyers in the automotive, construction, energy equipment, and consumer-packaged-goods (CPG) sectors account for the bulk of these increases.
Definitions of green materials are expected to become more stringent
In addition to higher future demand our survey suggests that definitions of what constitutes “green” offerings will become more stringent for all seven materials. By 2030, 57% of respondents expect to include suppliers’ Scope 3 emissions in their criteria for green materials, up from 48% today. The definitions of low-carbon footprint are also likely to change. For example, almost half of the steel producers and buyers we surveyed expect the definition to require less than 0.3 tonnes1 of total CO2 emissions per tonne of steel by 2030, up from 16% who view that as the criterion today. For aluminium, 29% expect less than 0.5t of total CO2 emissions per tonne of aluminium to qualify as green by 2030, up from 12% currently.
Green premia vary widely between sectors and regions
The majority of the buyers we surveyed are currently paying premia for green materials. However, there is high variation in the levels of the premia they report. These disparities may be because of limited information and benchmark data on green commodity prices that can guide buyer expectations and different levels of willingness to pay premia among sectors and companies. On a regional level, European markets have consistently higher green premia than North American ones, but the gap is expected to narrow by 2030 for most commodities. Nevertheless, most respondents don’t anticipate significant increases in green premia in the coming years. Notably, relatively few respondents expect no premia at all in 2030.
Price elasticity varies across commodities
Nearly 60% of survey respondents say that by 2030 they would be willing to pay additional premia to secure supplies of scarce green materials. Some segments of buyers report higher readiness to pay green premia than their overall industries. For example, CPG companies are willing to pay extra for green plastics and glass, while automotive and energy equipment producers will accept higher premia for green base metals. Such variation highlights the importance of laser-sharp customer segmentation when offering green materials.
Implications for commodities suppliers
Capitalising 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:
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.
*Christian Hoffmann is a partner in McKinsey’s Dusseldorf office; Michel Van Hoey is senior partner in Luxembourg; and Oleksandr Kravchenko is managing partner in Kyiv.
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