Lack of investment in mining industry could threaten climate goals
The energy transition is a commodities transition — metals and minerals are critical inputs for low-carbon technologies such as wind turbines and electric vehicles (EVs). McKinsey and Company writes that the importance of metals and minerals is evident in the rapid growth of commodity trading pools, which nearly doubled year over year, reaching close to $100 billion in 2022. Further, metals and minerals are poised to make up an increasing share of the value pool in the coming years.
However, McKinsey and Company warns that the world could see significant shortages of rare earth metals and minerals critical to the energy transition by 2030 due to a lack of funding for new mining projects. Soaring demand is creating a major trading opportunity with McKinsey analysis revealing a more than 170 percent growth in commodity trading value pools for metals in just three years.
The report warns that the looming energy transition could be jeopardized by surging interest rates and a reduction in available financing. This has led to mining companies cutting investment. The report, titled The Trading Opportunity That could Create Resilience in Materials reveals that sector spending in aggregate fell to around $40 billion in 2022 despite the recent uptick from 2020 lows.
The report indicates imminent shortages of 20-50 percent across some rare-earth metals and minerals essential for renewables, power grids and EV batteries by 2030, driving demand for huge investment in new reserves.
“Our analysis shows commodity trading pools have nearly doubled year over year, reaching nearly $100 billion in 2022 and metals and minerals will make up an increasing share of the value pool in the coming years,” Roland Rechtsteiner, Partner at McKinsey, said. “Traders can capitalize on this opportunity by supporting increased liquidity and price discovery in rapidly evolving metals and minerals markets, providing ESG blending solutions tailored to each market and boosting risk management capabilities to provide these services for counterparties including new market entrants.”
Long lead times for new mines along with low commodity prices have exacerbated supply chain shortages for new green technologies. McKinsey notes that commodities are currently significantly underpriced despite massive demand with the Goldman Sachs Commodity Index only just starting to rebound from all-time lows vs the S&P 500.
For some commodities, such as copper, lithium, and boron, supply will fall well short of demand by 2030. Inadequate capital expenditures and delays in bringing new capacity online are likely to contribute to price spikes and to inject uncertainty and volatility into the markets. Meanwhile, rising protectionism, geopolitical disruptions, and concentrated supply chains could disrupt trade flows and give rise to regional markets.
It is anticipated that EV batteries and chargers alone may consume more than 50 percent of all available cobalt and rare-earth elements and 36 percent of nickel resources by 2030. McKinsey highlights that recycling could only account for 10 percent of supply for minerals such as copper, lithium, and nickel by 2040 and potential substitute materials are still nascent.
“There are many hurdles to developing new metal and mineral reserves with investors favoring other industries, and many proposed mines involving new technologies and inexperienced companies as well as ESG and permitting barriers. Mines take an average of up to 15 years to become operational and some projects planned today wouldn’t begin production until about 2040,” Spencer Holmes, Associate Partner at McKinsey said.
“Large energy firms could help address the renewable supply chain shortage at source by expanding into metals and minerals. Traders could also accelerate development by pre-financing junior mines and helping producers gain access to markets. Metals and minerals producers could also encourage long-term supply deals to pre-finance projects.”
In the report, McKinsey suggests three paths to help companies shore up their positions and find new opportunities amidst the growing uncertainty and complexity of commodities markets.
Traders: Traders can help address metals and minerals shortages by supporting liquidity and price discovery in rapidly changing metals and minerals markets, providing ESG blending solutions tailored to each market, boosting risk management capabilities to provide these services for new market entrants and directly investing their own capital in alleviating the supply shortage
Metals and minerals producers: Producers could negotiate long-term supply deals to pre-finance new mining projects, customize high quality metals to specific customer segments, explore new product differentiators (particularly green product price discovery) understand supply chain vulnerabilities such as over-reliance on some countries for solar parts and use trading to optimize their portfolio management
Major energy companies: Big energy firms could expand into the supply chain to alleviate the shortage. For example, energy firms could harness their expertise to expand into metals and minerals