Clean energy technologies are set to drive growth in demand for critical minerals over the next two decades, throwing up a rich seam of investment opportunities – and challenges.
Read this article to understand:
- Why demand for metals such as copper is set to soar
- The obstacles to increasing global supply
- Opportunities presented by the electrification of mining
As efforts to tackle climate change intensify, the world is set to shift from a “fuel-intensive to a mineral-intensive energy system”, according to the International Energy Agency (IEA).1 This is driving a significant increase in global appetite for minerals such as copper, nickel, lithium, cobalt and rare earth elements.
Until the mid-2010s, the energy sector represented a small part of total demand for most minerals. But now renewable energy technologies and electric grids are the fastest-growing segment of demand as the energy transition gathers pace.
While solar plants and wind farms may not require fossil fuels to operate, an onshore wind facility requires nine times more mineral resources than a gas-fired plant of the same capacity. Since 2010, the average amount of minerals needed for a new unit of power generation capacity has increased by half as the share of renewables has risen. As for a typical electric vehicle (EV), it requires six times the mineral inputs of a car with an internal combustion engine.2
As demand for minerals grows, prices are rising and attention is turning to the mining companies that can supply them. But while mining firms stand to benefit from these trends, they also face challenges, not least capacity constraints, long lead times and questions over the environmental impact of their operations.
Much of the current focus is on copper supply. One of the best electrical-conducting metals, copper is an essential element in almost all electricity-related technologies and is widely used in motors, batteries and wiring. Huge amounts of this metal, along with aluminium, are used in electric grids.
Lithium, cobalt and nickel play a central role in boosting battery performance. Rare earth elements are used to make powerful magnets that are vital for wind turbines and EVs. Hydrogen electrolysers and fuel cells require nickel or platinum group metals depending on the technology type.
Energy transitions are already the major driving force for total demand growth for some minerals
Energy transitions are already the major driving force for total demand growth for some minerals. For instance, since 2015, EVs and battery storage have surpassed consumer electronics to become the largest sources of demand for lithium, together accounting for 30 per cent of the total.
According to the IEA, a concerted effort to reach the goals of the Paris Agreement would mean a quadrupling of mineral requirements for clean energy technologies by 2040. Under this scenario, such technologies will gobble up 40 per cent of the world’s supply of copper and rare earth elements, between 60 and 70 per cent of nickel and cobalt, and almost 90 per cent of lithium. An even faster transition, to hit net zero globally by 2050, would require six times as many mineral inputs in 2040 as today.3
Peter Fitzgerald, chief investment officer, multi-asset & macro at Aviva Investors and portfolio manager on the AIMS Target Return strategy, says mining companies are set to be among the key beneficiaries from this rise in structural demand.
“We like the mining sector, partly because we believe demand is set to rise but especially because of the lack of investment across a whole range of materials. The fact these companies have got debt down quite sharply over the past seven or eight years and now have healthy balance sheets is an added attraction,” he says.
However, miners may struggle to keep pace with the world’s growing appetite for minerals, since new mines tend to take years to come on-stream. This is likely to result in sustained upward pressure on copper prices as the electrification of transport, industry and homes accelerates, even though an uncertain macroeconomic picture is holding down prices in the short term.
Over the medium term it is unclear how enough copper will be mined to meet demand
“Sluggish growth in China and the ongoing risk of a recession in the West has put pressure on copper prices since the start of this year. While this trend might continue for a while longer, over the medium term it is unclear how enough copper will be mined to meet demand,” Fitzgerald says.
According to a 2022 report by S&P Global, the US financial information provider, global demand for copper will likely double to 50 million metric tonnes (MMT) by 2035 if countries are to meet their 2050 net-zero targets. With global reserves having risen around 40 per cent to 880 MMT over the past decade, there is no shortage of copper in the ground. The problem is getting it out.4
S&P Global warns that should current trends in capacity utilisation of mines and recycling of recovered copper persist, the supply shortfall could be as high as 9.9 MMT by 2035. Even assuming “aggressive” capacity utilisation rates and all-time-high recycling rates, the market is likely to be in deficit, it says.5
Echoing these views, the IEA estimates that in a scenario consistent with climate goals being met, expected supply from existing mines and projects under construction will only meet half of projected lithium and cobalt requirements and 80 per cent of copper needs by 2030.6
“Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles,” the IEA argues.
James Balfour, co-manager of the Aviva Investors UK Equity Income strategy, says such concerns are already starting to occupy the minds of managers of a range of companies reliant on copper.
“In our conversations with power companies like National Grid and SSE, they tell us one of their biggest concerns is where all the copper they need for new electric cables will come from, and at what price,” he says.
The head of mining giant Anglo American, Duncan Wanblad, warned in July 2022 the world was heading for a severe shortage of copper as new mines become increasingly difficult to build.
I genuinely don’t see where all of this copper is going to come from at this point in time
“I genuinely don’t see where all of this copper is going to come from at this point in time,” Wanblad told Bloomberg. “There are lots of copper resources in the world, and I think those resources could be brought to book, but the length of time it takes is completely under-appreciated by the market.”7
Anglo’s Quellaveco mine in Peru began production in 2022. It will help push the company’s copper output up to around one million tonnes a year, putting it among the world’s biggest producers. But the project took around three decades to get up and running.
The IEA estimates that following discovery, it takes on average over 16 years for mining projects to begin production. Local opposition to getting new mines built can be fierce and is a big obstacle to lifting production, with major projects stuck in limbo around the world.
Efforts to lift global production are likely to be hindered in other ways. While there may be no shortage of resources, the quality of many ores is declining. For example, the average copper ore grade in Chile, the world’s biggest producer, has fallen 30 per cent over the past 15 years.
The country’s Escondida mine in the Atacama Desert is the world’s largest copper mine, producing around five per cent of global output. Whereas its copper grade was 1.72 per cent in 2007, by 2021 this had declined to 0.52 per cent.8
Extracting metal content from lower-grade ores requires more energy
Extracting metal content from lower-grade ores requires more energy, exerting upward pressure on production costs, not to mention greenhouse-gas emissions and waste.
This adds to growing concern over the adverse environmental impact of mining. Some other examples of the negative effects include deforestation/habitat destruction, pollution, fresh-water depletion, soil erosion, human-wildlife conflict and biodiversity loss. Little wonder companies are under growing pressure from consumers and investors to source minerals that are sustainably and responsibly produced, further constricting output.
Hedge your bets
A lack of investment in new mines could lead to additional upward pressure on a variety of metal prices, not just copper, as miners struggle to meet demand.
Balfour, whose fund also has exposure to miners, says it makes sense to own companies extracting a diverse range of metals, thereby reducing exposure to big fluctuations in a particular commodity’s price.
There is little doubt demand for some metals is set to grow sharply
“There is little doubt demand for some metals is set to grow sharply. Given the difficulty in lifting production, we would expect that to eventually be reflected in higher prices. However, while Chile-based mining group Antofagasta offers a pure play in copper, even the copper price doesn’t move in a straight line. Near term, it will be vulnerable to the threat of a further deterioration in the Chinese economy,” he says.
Beyond investing in miners directly, another way of accessing the growth in demand for minerals is to target suppliers to the industry. Balfour’s strategy also has a stake in Weir Group, a major provider of mining machinery and processing equipment. This is a company which ought to benefit from rising demand for metals and the need for investment in new mines, but without being so exposed to underlying metal prices.
“One of the things we like about Weir is that as with other mining equipment groups, a large percentage of its revenues come from the ‘aftermarket’ – servicing of their equipment. Once you’ve got an installed base, you’ve got a very strong cash-generative, high-margin, business,” he says.
Another way for investors to take advantage of the rise in demand for minerals is to focus on companies that help miners reduce their own carbon footprint.
Many of the world’s leading miners are electrifying their fleet of vehicles and many other parts of their operations. Andrea Carzana, manager of the Aviva Investors Climate Transition Global Equity strategy, says this provides significant growth opportunities for Epiroc and Sandvik. When it comes to supplying the equipment needed to electrify production of mines deep underground, where most of the minerals needed to power the energy transition are found, the two Swedish companies boast a dominant position, with a combined market share of roughly 80 per cent.
Mining companies have a massive incentive to decarbonise
“Mining companies have a massive incentive to decarbonise, not just because it is beneficial for the environment, but also because it will potentially save them a lot of money,” Carzana says.
Fossil fuels power most of the machines currently working underground. They are less reliable than electric versions and extremely expensive to repair when they break down. Not only that, but the emissions they generate make it impossible for humans to work. As a result, ventilation is often a huge expense for underground mines, accounting for up to 20 per cent of operating costs. By contrast, mines using electric equipment spend a fraction of that on ventilation.
Carzana says this explains why most of the orders both Epiroc and Sandvik are now taking are for electrified trucks.
“In the past, miners used to buy an entire fleet. Now they're buying one piece of equipment at a time. It will take decades, but it’s clearly a big structural growth tailwind,” he adds.
The mining industry looks to be facing a watershed moment as the world steps up efforts to decarbonise. Long considered a dirty and environmentally destructive industry, it looks set to play a central role in the clean energy transition. While questions remain over capacity, this is likely to throw up a wide range of investment opportunities across the value chain, in raw materials, miners and other companies that depend on them.