Executive Summary
- Though demand for metals is skyrocketing, uncertainty, price volatility and CAPEX needs make companies very cautious. According to the International Energy Associations (IEA)’s stated policies scenario (STEPS), demand for metals could double (even triple if we take the Announced Pledges Scenario (APS), which take for granted the fact that governments will reach all announced goals). Copper (2x) and lithium (7x) will be the most in demand, which should lead to higher prices for the sector. But timing the increase in supply is key: In the last 18 months, lithium prices have slumped by -85% as supply has increased by +70% since 2021. Volatile commodity prices and uncertainties around policy and regulations have made companies cautious about committing substantial investments to long-term, capital-intensive projects. Though capex has been growing, in 2023 it stood just 22% above 2015 levels. Instead, companies in the sector are increasing further the pay-outs to shareholders: In 2023, dividends and stock buybacks were almost four times higher than in 2015. This conservative capital allocation is echoed in the growing M&A activity to acquire well-established assets.
- Speculative behavior is on the rise and fuels bubbles which could be detrimental to metals and mining firms as well as downstream sectors. Our analysis reveals that speculation has been rising on a certain number of metals. Since 2022, the speculative index for copper has been on average 30% higher than between 2006-2019. Speculation also remains elevated for cobalt while it has been declining for lithium as prices plummeted recently.
- Exploration needs to step up as mining lead times are getting longer. Some metals are at risk of falling into a supply gap, which will require more investments in exploration and the development of new capacities. In 2023, exploration budgets declined -3% from a nine-year high in 2022 to reach USD12.8bn. These budgets are not expected to increase substantially, which could hinder the sector in the longer run as mining lead times are now close to 18 years for recently opened mines, up from 13 years for mines that opened between 2005 and 2009. Countries such as Canada, Australia and Chile, which have large metals reserves and benefit from significant exploration budgets, could see their metals export increase substantially. Indeed, Canada and Australia expect their metals exports to double by 2030.
- To close supply gaps, governments should broker alliances and partnerships with mineral-rich countries. They could also support in de-risking some projects, while miners should invest in technologies to make exploration and mining faster and more efficient. Recycling should also be high on the agenda for both governments and companies. Client sector firms at risk of a profitability shock due to higher costs should consider diversifying supply chains, vertical integration and looking into alternative technologies to increase their resilience.
- Alternative technologies should incentivize innovation and strategic planning for mining majors and not a wait-and-see attitude. Most technologies related to physical products take anywhere between 15 to 50 years to reach commercial applications and investors should not use technology as an excuse to avoid the green rush. Worse, by not making the proper investments, they incentivize substitution technologies. The recent developments around sodium-ion batteries coincided with sky-high lithium prices. Providing sufficient supply of metals at reasonable prices, strategic planning and innovation should also be at the heart of the metals and mining agenda.