The metals and mining sector will be foundational in the effort to limit climate change. In effect, 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). Their importance is reflected in the rapid growth of commodity trading pools, which nearly doubled year over year, reaching close to $100 billion in 2022 (Exhibit 1).1 Further, metals and minerals are poised to make up an increasing share of the value pool in the coming years.
The market is characterized by a significant imbalance. For some commodities, such as copper, lithium, and boron, supply will fall well short of demand by 2030.2 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.
The move from hydrocarbons to low-carbon energy sources will create opportunities in the long term. Yet players that wait for liquidity as markets develop will find their options limited. Producers, traders, and big energy companies can take actions to develop new capabilities, expand into different parts of the value chain, and pursue new opportunities. Their actions could also support the energy transition by ensuring capital flows to increase supply and build out infrastructure.
Assessing the mismatch in commodities
Divergent trends in demand and supply have created a substantial misalignment over the long term that could threaten the energy transition’s progress.
Underestimating demand in the coming years
Reaching net-zero emissions by 2050 will require a transition to clean and low-carbon sources of energy. To support continued economic growth during this period, the resource base will have to double. That could require nearly $200 trillion in investment through 2050 for EVs, upgraded power grids, and low-carbon power.3
Metals and minerals will be in greater demand because lower-carbon technologies typically require more of these materials than conventional energy sources (Exhibit 2). An offshore wind turbine requires 15 times the mineral inputs to produce an equivalent amount of power versus a natural-gas installation, while battery EVs are 15 to 20 percent heavier, on average, than internal-combustion-engine automobiles. In 2030, battery EVs and the associated charging infrastructure will consume upwards of 50 percent of rare earth elements, 55 percent of cobalt, and 36 percent of nickel.4
Gauging future supply
Spurring investment is crucial because supply is projected to fall well short in the coming decades. Several factors could constrain capacity.
Concentrated supply chains and protectionism. Long before the energy transition became a strategic priority for countries around the world, China was taking prescient action to position itself as a dominant player. In 1992, Chinese premier Deng Xiaoping reportedly remarked, “While the Middle East has oil, China dominates rare earths.” Its share of production reached a high of 98 percent of global supply in 2009.5 China also established supply chains for other minerals in clean energy and now processes more than 40 percent of materials across most categories, putting itself in an advantageous position as a net exporter.
From a geographic standpoint, China’s concentration of clean-energy supply chains and scale means the country’s plans for the years ahead could have an outsize impact on the market. Similarly, emerging electro states—for example, Australia (lithium), Chile (copper), the Democratic Republic of Congo (cobalt), and Indonesia (nickel)—could influence the market for their respective minerals (Exhibit 3).
Geostrategic bottlenecks have begun to emerge. For example, Chile, the second-largest producer of lithium, announced plans to nationalize its reserves.6 Indonesia’s government leaders have instituted limits on nickel exports, a move felt especially in the European Union. Over the long term, countries could seek to use their mineral and metal production to gain a geopolitical advantage and build local industry and employment, a trend that could contribute to more regionalization.
This high level of concentration is counterbalanced by an increasingly regionalized regulatory landscape. Other countries will likely seek to establish their own clean-energy supply chains (for example, through the Inflation Reduction Act in the United States or similar policies in the European Union), thereby creating a more dynamic market environment.
Obstacles to new capacity. Funding exploration projects to identify previously unknown reserves will be critical to the market’s evolution. But at a time when huge levels of investment will be needed, the landscape has become more challenging. Rising interest rates and decreased availability of financing means producers will have to pay a premium to secure funding for capital expenditures, which could hinder their ability to take advantage of new opportunities.
Aligning new capital expenditure projects with market demand has always been a challenge because of longer lead times for bringing new capacity online. For example, the average mine takes five to 15 years to become operational (depending on material and project characteristics),7 a timeline that assumes no issues with permitting; no environmental, social, and governance (ESG) objections; and no water stress, among other issues. Many of the proposed mines involve new technologies deployed by relatively inexperienced companies, so delays in production and scaling are likely. Some new mine projects planned today wouldn’t start producing until around 2040. Since mines can require a huge amount of hydrocarbon energy (depending on the project and commodity), they are likely to come under heightened scrutiny by regulators and the public, potentially delaying their progress further.
Limited recycling and nascent substitutes. Minerals critical to the transition, such as lithium in EV batteries, are in such demand because they are currently the only option for certain clean-energy sources. Reuse could address a portion of demand: the International Energy Agency estimates recycling could account for 10 percent of supply for minerals such as copper, lithium, and nickel by 2040.8 However, the first generation of renewable technologies must be built before such minerals can be recycled.
Amid inadequate supply of selected commodities to support the energy transition, research and innovation could increase overall supply by ramping up the production of suitable alternatives. The battery sector offers a helpful point of reference. The growth of batteries containing high amounts of nickel resulted in price spikes as customers sought to secure a steady supply. Battery producers and OEMs responded by prioritizing optionality. For example, manganese is a possible alternative and has global production that is four to five times greater than that of nickel.9 Toyota’s recent announcement of a breakthrough in its development of a solid-state battery reinforces the potential of innovation to significantly shift demand for minerals.10
Similarly, the rise of competing technologies such as sustainable liquid fuels, which don’t require the same amount of infrastructure spending, could fill the gap in the energy transition. In general, the global economy will reward pathways that offer alternatives to scarce materials; once those pathways are established, there is no going back.
The result: Long-term deficits in commodities
The divergent trajectories in supply and demand are projected to create significant long-term deficits in commodities. Indeed, across a range of minerals and rare earth metals, McKinsey analysis of two different scenarios—a base case and a high case—indicates that supply is dwarfed by the collective demand from the energy transition and other uses through 2030 (Exhibit 4).11
Despite the critical need for more investment, investors have favored other sectors (such as technology and healthcare) over the past several cycles, expanding the underfunding gap and creating a more urgent need for action. Commodities remain mispriced and, in fact, are often being shorted as a recession hedge, a repeat of the strategy investors commonly used in 2008. Today, the Goldman Sachs Commodity Index is only just starting to rebound from all-time lows versus the S&P 500 (Exhibit 5).
In the face of rising long-term demand, commodities players have incentives to focus on short-term strategies. Since 2012, mining companies have trimmed capital expenditures, with sector spending in aggregate falling to around $40 billion in 2022, despite the recent uptick from 2020 lows. Rather than allocating funds for capital expenditures, companies are putting money into dividends and stock buybacks. M&A has also become an attractive option, particularly in mining.
The energy sector is taking a similar approach: with free cash flow yields at an all-time high, both oil and gas and renewables companies are opting for debt repayment and dividends over capital investment (Exhibit 6).
How three categories of players could shape the market
In the years ahead, the metals and minerals markets will be complex and uncertain. Shifting supply and demand, technological advancements, and regulatory compliance will all affect the global market’s trajectory. Companies can take targeted actions now to shore up their position and prepare to pursue new opportunities.
Metals and minerals producers
As we have discussed previously, the energy transition is redefining the commodity asset class.12 New offerings could be differentiated by geography, production methods, regulatory treatment, and environmental impact. Opportunities include the following:
- tailoring high-quality products to specific customer segments (a clear differentiator in metals, where spreads in certain metals have widened dramatically)
- anticipating and locking in demand, as well as gaining insight into product differentials (particularly green-product price discovery)
- understanding value chain bottlenecks and dependence on specific suppliers, countries, and regions (for example, China’s dominance across battery and solar supply chains)
- using trading to optimize corporate portfolio management (for instance, by taking long and short positions with different timelines to hedge exposure and thereby increase the risk/return of the portfolio)
- shaping customer behavior strategically (such as encouraging long-term supply deals to prefinance projects)
Another priority will be building a strong origination function to improve market access through more sophisticated marketing and trading functions. The increased fragmentation and deglobalization across several markets will make price formation and discovery more complex. For example, nickel sulphate dominates the delivered market but has become fully disconnected from the London Metal Exchange (LME) Nickel benchmark price, pushing metals players to conduct independent price discovery. Being active across the value chain will help metals players manage increasing macroeconomic and geopolitical risk.
Traders can play a critical role in addressing the commodities challenge by focusing on three core areas. First, they could support the development of liquidity and price discovery in rapidly evolving metals and minerals markets. In addition, traders could provide products tailored to each market’s ESG specifications. They can also enhance their risk management capabilities to provide these services for established and new counterparties entering these markets for the first time. Last, by drawing on their capital, traders can help to directly address the supply gap (for example, accelerating asset development by providing prefinancing to junior mines).
As markets take shape, traders could become more active in adjacent areas, such as offering logistics solutions (for example, helping lithium producers gain access to markets). Their understanding of the full value chain could enable them to play a more active role in origination and M&A. Further, an in-depth understanding of cross-commodity dynamics—such as the interplay between natural gas, ammonia, and bunker fuel—could allow traders to anticipate substitutes in a given value pool.
Major energy players
The energy transition will be accompanied by a trilemma: how to ensure energy continues to be available, affordable, and sustainable. These three interrelated factors will require major energy players to play a fundamental role in providing traditional energy sources to ensure sufficient supply while mineral and metals production ramps up.
To remain competitive and replace the shrinking oil and gas margin pool over the coming decades, players will need to expand activities beyond their role in maintaining the existing supply base into new parts of the value chain. For example, several supermajors have already achieved scale in power markets and biofuels. We also expect to see energy players use their expertise to expand into metals and minerals to capture margins tied to the volatility in the energy transition. For example, ExxonMobil recently acquired drilling rights in land believed to be rich in lithium in the southern United States, giving the company access to a critical component for EV batteries.13
The energy transition will drive an unprecedented growth in demand for metals and minerals that underpin key transition technologies. However, supply faces structural constraints to bring on new investment, to scale substitutes, and to navigate concentrated supply-chain bottlenecks, resulting in a long-term deficit in critical commodities.
This shortfall presents an exceptional set of opportunities. Metals producers, traders, and a broader set of energy players could unlock new sources of supply, provide critical commercial services (such as price discovery) to an increasingly sophisticated group of customers and counterparties, and maintain the existing supply base of traditional energy sources to support a relatively orderly transition.