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Resource Revolution and a Green Paradox?

Resource Revolution and a Green Paradox?

10 November 2021

Resource Revolution and a Green Paradox?

Mark Smith, Co-manager, TB Amati Strategic Metals Fund November 2021

An energy system powered by clean energy technologies needs significantly more minerals, notably:

Lithium, nickel, cobalt, manganese and anode graphite for batteries

Rare earth elements (mainly heavy REEs) for wind turbines and electric vehicles motors

Copper, silicon and silver for solar PV

Copper and aluminium for electricity networks

There is no shortage of mineral resources, but recent price rises for cobalt, copper, lithium and nickel highlight how supply could struggle to keep pace with the world’s climate ambitions.

An analysis of the projected share of clean energy technologies in total demand for selected minerals in a sustainable development scenario (1.5°C) – shows the above-mentioned metals could benefit strongly.

Mineral demand for clean energy technologies by scenario

Source: International Energy Agency

In the short term the supply-demand picture for the base metals and specialty metals is well matched, however if you project the committed mine production against primary metal demand an emerging deficit presents itself in the medium term. 

Either the global climate ambitions will have to be tapered or we will have to adjust to an inflationary commodity environment under a sustainable development scenario (wrt climate change).

Supply and demand projections (under a sustainable development scenario)

Source: International Energy Agency

Put another way? The energy transition starts and ends with (strategic) metals and a primary supply response needs significant capital investment both for exploration and mine development.

According to Wood Mackenzie the challenge of scaling up primary base supply is massive:

Base case 2.5°C pathway = US$0.5 trillion capital investment over next 20yrs 

Accelerated energy transition; net zero by 2050 and limits 1.5°C temperature rise = US$2.0 trillion over next 15 yrs

 

Source: Wood Mackenzie

ETO= Wood Mackenzie's Energy transition outlook scenario (1.5°C pathway)

- A 5 X increase in base metal supply is needed by 2040. Worse case without significant scrap recycling:

  • 11.3Mt aluminium deficit
  • 19Mt copper deficit
  • 3.5Mt zinc deficit
  • 2.6Mt nickel deficit
  • 2.2Mt lead deficit

- Battery metals 7x to 42x current demand/supply???

Is the mining industry prepared? NO!

During the last ‘mining boom’ investors encouraged miners to grow at any cost, growth over margin was the investors choice. This led to over geared balance sheets and a peak (2012) in development capital to bring new mines on line. The metals cycle changed and mines closed, and the development capital shrunk. We entered a 10 year period of debt restructuring and financial discipline. In reality the industry should have been doing the opposite to prepare for this new metal demand wave. 

Annual development capital has more than halved ($130bn to $60bn) and exploration expenditure over the same period fell from a peak of $21bn in 2012 to $8.7bn in 2020.  With the lead time of 7-10 years to bring a new mine on stream, we could witness significant pinch points post 2025/2027.  

Investors should now be demanding production and development growth NOT dividend yield, as our industry is entering a phase of ex growth, declining reserve life and lower mineral grades. 

The next decade should be very interesting for the resource investor from a capital growth of mining investments and an aggressive M&A cycle as the majors mop up the mid-caps to maintain a growth profile.

 

Global (non-precious metal capital expenditure US$bn)

Source: Scotia Bank

Resource nationalism inevitable?

An evolving clean energy transition calls for an evolving approach to energy security; policy makers must expand their horizons and act to reduce the risks of price volatility and supply disruptions.  

Production and processing of many minerals such as lithium, cobalt and some rare earth elements are geographically concentrated, with the top three producers accounting for more than 75% of global supplies.  

 

Supply chain concentration (and control)

Source: International Energy Agency

Ironically, China is the largest single emitter of greenhouse gases, yet controls the majority of minerals and processing facilities to produce metals and chemicals key for the western world to decarbonize its energy supply. There lies the problem!

In summary:

1. The mining industry is not currently prepared to respond to the green ambitions of politicians.

2. Renewable energy technology will have to improve/adapt to thrift out some key metals to ensure a sustainable supply-demand balance.

3. Metal demand for decarbonisation will have to take precedent over other discretionary demand sectors

4. Policy makers globally (ex-China) will have to act quicker to ensure the extraction and processing of key metals are permitted outside China within the next 7-10yrs.

5. And we haven’t even addressed the role uranium will play in the green energy transition…

This article is a financial promotion issued by Amati Global Investors Limited, which is authorised and regulated by the Financial Conduct Authority. It is provided for informational purposes only and does not represent an offer or solicitation to buy or sell any securities. Nor does it provide you with all the facts that you need to make an informed decision about the merits or otherwise of this Fund. Please refer to the risk warning below. 

Risk Warning 

Past performance is not a reliable guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount they originally invested. The investments associated with this fund are concentrated in natural resources companies, which are subject to greater risk and volatility than companies held in other funds with investments across a range of industries and sectors. The return on investments in overseas markets may increase or decrease as a result of exchange rate movements. Shares in some of the underlying companies associated with the fund may be difficult to sell in a timely manner and at a reasonable price. In extreme circumstances this may affect the ability of the fund to meet redemption requests on demand.