Strong demand curve, sagging capital investment

Are short term market dynamics masking sustained opportunities for mining investment?

Commodity Insights

Capital markets are underestimating the critical role the mining industry plays in supporting the $85 trillion global economy, delivering economic growth, supporting infrastructure and enabling zero-emission energy generation. The technology we take for granted – and the innovations we hope to see in the future – cannot be achieved without reliable access to the raw materials provided by the mining industry. The evidence for strong, sustained long-term demand is clear, with normal cyclical growth being amplified by two profound secular drivers: the green energy transition and global middle income growth.  The combined magnitude of these demand drivers, combined with a decade of underinvestment in new metal and mineral supply are setting conditions for a period of potentially unprecedented mining industry growth.

A Paradigm Shift in Mineral Demand

The green energy transition

The International Energy Agency (IEA) has made it clear that “an energy system powered by clean energy technologies differs profoundly from one fueled by traditional hydrocarbon resources.” Green energy technologies require substantially more mined minerals and metals – especially critical minerals like lithium, nickel, manganese, cobalt, graphite, and rare earth elements. Each electric vehicle (EV) needs six times the mineral inputs of a fossil-fuel powered car. An on-shore wind plant requires nine times the mineral inputs of a gas-fired power plant. And electrical grid expansion requires enormous amounts of aluminum and copper.1

Another IEA study focused solely on the global EV battery supply chain2 found that to satisfy government-mandated electric vehicle production by 2030, the world will need:

  • 50 more lithium mines – a six-fold increase over current production levels
  • 60 more nickel mines – about double current production
  • 17 more cobalt mines – an increase of 75% over current levels

The IEA goes on to note that efforts to reach the widely-accepted climate goals of the Paris Agreement – and the IEA’s Sustainable Development Scenario (SDS) – would mean “a quadrupling of mineral requirements for clean energy technologies by 2040” (Figure 1). A more aggressive scenario that achieves net-zero global emissions by 2050 would require six times more mineral inputs. But no matter which energy transition scenario is considered, society will witness a material shift in the structure of energy markets driven by the need to decarbonize. That push will create unprecedented long-term demand for metals and minerals across the global energy transition spectrum.

Figure 1: Clean energy demand growth for selected minerals, 2040 relative to 2020

The global middle income boom

Around the world, people are moving out of poverty and into middle income.  While poverty is still a problem the world cannot ignore, overall, populations are becoming wealthier.  The Brookings Institution estimates that by 2030, more than half of the world’s population will achieve upper- or lower middle-income status – just under 5 billion people3. Their higher incomes will create rising demand for material goods – everything from air conditioners, to cell phones, to new homes.  Most of this new middle class lives in Asia and Africa, and their countries are industrializing – and urbanizing – at an increasing rate. Urbanization coincides with income growth because it allows more efficient access to resources that promote economic betterment.

Oxford Economics estimates that over the next two decades, the world’s 900 major cities will experience a combined population increase of nearly 600 million people. That will drive unprecedented demand for mined commodities like cement, and especially, the metals that support infrastructure and the spread of electrification (Figure 2). Like the IEA, the Swann Index forecasts doubled demand for nickel, along with significantly increased demand for copper, aluminum, and steel to satisfy the demands of urban growth.

Figure 2: Global middle income growth and rising commodity demand

No matter what estimation method you look at, the demand for metals and minerals will continue to grow rapidly over the next few decades, creating an unprecedented paradigm shift with normal cyclical growth being amplified by these two profound secular drivers. The question is, why hasn’t the metals and mining industry responded to clear supply deficit signals as it has in the past?  

Capital markets underinvestment magnifies an opportunity

The $1.2 trillion metals and mining sector is a key enabler of the $85 trillion global economy. In a very literal sense, without mined materials there can be no consumer durable goods, no infrastructure development, and no real assets. Mining activity and investment needs to grow in proportion to the much larger markets that depend on it, and cyclical and secular indicators all point to the fact that the mining sector must prepare for renewed growth. But as Figure 3 shows, sufficient capital isn’t flowing in to balance current supply and demand – let alone meet future needs.

Figure 3: Mining capital expenditure (capex) vs. commodity prices, 1997-2021

How did we arrive at this point? The simple explanation is that falling commodity prices disincentivized mining capital investment (capex) from 2011 to 2016, and to a certain extent, continues to do so. While commodity prices have come back somewhat, there’s significant volatility due to a sequence of well-documented events: COVID shutdowns, global supply-chain disruptions, the Russia-Ukraine war, fiscal stimulus, inflation, tightening, then global recession fears. That volatility is masking upward pricing trends caused by a steepening demand curve.

The longer the imbalance between mining capex and demand continues, the longer it will cause problems for the downstream green energy, construction, manufacturing, tech, and other sectors that consume mined products – as well as the economy at large. Timing is also an issue: it takes 3-5 years to fund, construct, and ramp any new mining expansion, assuming all goes to plan (and over 15 years (on average) from the discovery of a new deposit). Even if the global economy goes into recession for 12 to 24 months, there won’t be enough mining capacity to satisfy demand as economic activity rebounds.

There’s an obvious counterpoint to these supply-side issues: opportunities are there to be had for investors willing to look past the market noise and allocate capital to undervalued mining assets – if they know where and how to look for them. Because as S&P’s Chief Energy Strategist Atul Arya notes, there’s a caveat to the demand forecasts: “A supercycle across a broad set of commodities is not fully baked in” – it’s more likely to occur across a narrower range of critical minerals and materials.

Capital will eventually flow into the sector. But the obvious time to invest may not be the best time to do so.

The real solution to global inflation is supply-side abundance. The world needs mined minerals to support the growth of shifting middle income demographics and make the transition to green energy. Yet despite the clear potential to earn outsized returns from mining investment, capital remains cautious, and public markets are disinterested.   

While supply-side expansion faces complexities across all the factors of production (land, labor, technology, and capital), there are those who are thinking through the challenges. Investors who are prepared to allocate capital now – and do so with partners who have the knowledge, skill, and appreciation for the factors of production that define the better opportunities – will likely be better positioned to earn contrarian returns ahead of industry and general investor participation in the coming upcycle.

Source of Data

1 The Role of Critical Minerals in Clean Energy Transitions. https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions.

2 Global Supply Chains of EV Batteries. https://www.iea.org/reports/global-supply-chains-of-ev-batteries.

3 “Middle Income” refers to Economic Development Level 2 and 3 (EDL2 and EDL3) countries, as defined by the World Bank and Brookings. https://www.brookings.edu/blog/future-development/2021/05/20/a-long-term-view-of-covid-19s-impact-on-the-rise-of-the-global-consumer-class/.

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