Mining and the energy transition

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The mining sector is no longer in thrall to the ebb and flow of the global economy, with the energy transition creating a new source of demand, says Olivia Markham, manager on the BlackRock World Mining Trust.

Mining has historically been seen as an industry whose fortunes are tied to the global economy. When economic growth is strong, demand for mined commodities rises, and as it weakens, demand falls. However, the energy transition is creating a source of structural demand for a range of mined materials. This is changing the nature of the sector.

The past five years have been a stronger period for mining companies [1], which has helped rebuild confidence among investors. Mining companies have generally been prudently managed, with sound balance sheets, lower debt and capital discipline [2].

Nevertheless, it is likely to encounter a more difficult economic environment from here. The reopening of the Chinese economy has been weaker than expected, removing an important source of demand for mined materials. There has been some expectation that the Chinese government would step in to support growth, but this has not yet significantly materialised.

There are also signs of weakness in other developed nations. In the US, Europe and UK, the impact of higher interest rates and inflation is starting to weigh on economic growth. This is likely to become increasingly evident in the fourth quarter of 2023 and first quarter of 2024. This is likely to depress some of the traditional sources of demand for mined commodities.

Demand created by the energy transition

However, our view is that new sources of demand are emerging as a result of the global transition to lower carbon energy options. The energy crisis created by Russia’s invasion of Ukraine has accelerated the move to renewables as global governments look to reliable and secure sources of supply [3]. The transition is happening at an increasing pace. There are now significant government support packages in place to build the requisite infrastructure – the US Inflation Reduction Act, for example, or Europe’s Fit for 55 [+].

The mining sector and materials sector has an important role in enabling the transition. It will deliver the copper needed for electrification, the metals needed to update electricity grids across the world, the lithium for use in batteries and the steel for wind turbines. The energy transition should provide a long-term source of demand for these mined commodities that will be structural rather than cyclical.

There are supply challenges for many of these commodities. They are hard to find and extract. Existing mines are mature, and, in some cases, it is proving difficult to grow production. This is particularly evident in areas such as copper: it is becoming tougher to find new sources in the ground, and labour shortages are compounding the problem [4]. In some cases, mining companies are turning to innovative technologies to expand production, rather than investing in new mines. Either way, it will take time to bring new supply on stream. This imbalance of supply and demand may support prices.

That said, the energy transition will inevitably be a bumpy journey. It is a vast global project, its outcomes are not always predictable, and technology is evolving all the time. There will be missteps along the way. For example, the nickel price has had a difficult year in 2023 [5], despite its importance in the construction of lithium-ion batteries for electric vehicles and energy storage systems. This appears to be due to worries on a growth in supply from Indonesia [6]. Equally, the lithium price has struggled after some over-exuberance in pricing during 2022 [7]. We need to remain alert to these shorter-term considerations within the context of the broader structural trend.

Best practice

There is another consideration. Businesses across the world are increasingly looking at the carbon impact of their supply chains. Mining can be carbon-intensive, but more innovative companies are looking at ways they can decarbonise production. Our view is that companies and governments will look to source more ‘green metals’, with the way commodities are produced becoming more important.

As part of our analysis, we want to ensure that companies are making the requisite investment in decarbonisation strategies. We recognise this may require a rise in overall expenditure, but we believe it will be an important part of future-proofing the business. In some cases, permitting regimes are becoming more stringent, and this is a trend that could accelerate in the future. Companies need to be on the right side of this shift.

We consider environmental, social and governance factors in all our analysis. It is a core component of the fundamental work we do with companies. Companies that neglect these areas could be exposed to more risk than their peers. Nevertheless, the decarbonisation impact from companies that get this right can be significant.

In the long-term, we believe the direction of travel is clear. It will not be a straight path, but the mining sector has a vital role to play in decarbonisation. Mining companies are providing the metals needed for the transition. If they can also reduce the intensity of their own emissions, the cumulative effect on global carbon emissions should be significant.

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