“There decarbonization of the economy requires a significant increase in green technologies, such as electric vehicles (EVs), solar photovoltaics, wind turbines and grid-level battery storage. All these technologies require a significant supply of minerals and a possible deficit of what are defined as “critical minerals” – such as cobalt, copper, lithium, rare earths, graphite and nickel – would lead to supply risks which could limit the pace and scope of the energy transition.” He explains it Albertine Pegrum-Haram, Senior associate Responsible Investments of Columbia Threadneedle Investments underlining that the European Union estimates that demand for rare earth metals and lithium will increase respectively by 6 and 12 times by 2030.
Energy transition is a material transition
While according to the Sustainable Development Scenario of the International Energy Agency the demand for copper will increase from 25 million of tonnes in 2022 to as many as 35 million tonnes in 2030. These forecastsi have triggered a wave of speculation on “supercycles” short-term of critical metals. As a result, many governments, such as those of the United States and the European Union, have introduced tariffs, international partnerships, and national policies to secure supplies and support the development of national supply chains. However, this optimism regarding demand should in our view be revised considering short-term situations such as the slowdown in Chinese construction, which has seen refined copper exports reach record levels in May-June 2024. This indicates crucial weakness in one of the key pillars of demand: 30% of copper today is used in the Chinese real estate sector. Furthermore, the growing volatility and polarization of sentiment around the energy transition, particularly due to election uncertainty in the United States, is helping to complicate the picture of long-term versus short-term demand.
In our opinion, “the energy transition will be – and it already is – troubled. We see countries and regions progressing at different speeds, with some reversing course on climate targets while others doubling down on them with stringent legislation, resulting in uncertainty about the timing of large-scale adoption of key enabling technologies. Overall, short-term political uncertainty is increasing the price volatility of critical metals, ultimately reducing new investment. For example, lithium prices surged more than 700% from 2021 to a peak in 2022, before declining in 2024.” Even the prices of nickel – explains the expert again – they collapsed in 2024 after cheap Indonesian nickel, financed by Chinese companies, led to significant oversupply in the market; this has seen major mining companies, such as Australian giant BHP, announce the suspension of domestic nickel production. On the other hand, we know that a secure and constant supply of critical minerals is critical to reaching net-zero. Delaying investment in mines could lead to even tighter supply chains if there is a surge in demand for critical technologies, for example due to sudden policy shifts towards net-zero as the impacts of climate change are felt most.
The development of new mines is already hampered by long authorization times in many regions and is getting worse. According to S&P, the average time for mines to come online has increased steadily, from an average of 12.7 years in 2005-09 to 17.9 years in 2022-23. Greenfield projects are also considered expensive and risky in the sector as the reduction in certainty about the timing of the energy transition and the scalability of technologies translates into price volatility. More recently, in fact, the sector has focused on mergers and acquisitions and the adoption of new technologies to increase the quality of minerals, rather than on the development of new assets to increase exposure to metals such as copper. This misalignment of timing and market sentiment could lead to a rush to supply critical metals at all costs, for example by redirecting more supplies to regions with inadequate labor and human rights policies, resulting in an increase in social and environmental risk.
The new geopolitics of critical minerals
Although dependence on raw materials has always been at the center of trade dynamics, what is new is the focus on metals and minerals that had not previously driven trade relationships. In recent years, ensuring reliable and diverse supplies of critical metals has emerged as a strategic priority for the United States and Europe. Supply concentration is a key concern for understanding how price dynamics and the characteristics responsible for mining will develop. Today China it controls approximately 60% of lithium refining, 40% of copper refining, and 90% of rare earth element processing capacity globally. The country also represented i44% of global M&A investments on lithium (in terms of value) over the last three years.
In the meantimeIndonesia’s share in nickel production and refining increased from 34% to 52% and from 23% to 37% respectively between 2020 and 2023. This trend of supply consolidation has catalyzed a renewed geopolitical focus on “mineral security” and nationalization of resources. To date, tensions have risen: Tariffs on Chinese EV imports into the US, as well as those proposed by the EU, could lead to retaliation from China, which ultimately holds the trump card in battery supply chains. Restrictions on exports of critical minerals by producing countries such as China have increased fivefold over the past decade, rising from nine cases in 2009 to 49 cases in 2019. Indeed, the European Union’s Critical Raw Materials Act of 2024, which mandates that no supplier can supply more than 65% of the EU’s annual consumption of critical metals, and the US-led Minerals Security Partnership, are policies and initiatives designed to redraw the supply map.
The responsible investor’s dilemma
The race for critical minerals “presents new opportunities and risks for investors. Increased demand for “transition minerals,” coupled with tight supply, could have a significant impact on mining companies’ earnings as prices rise. Furthermore, what in the past has been a sector considered problematic for investors attentive to ESG issues could undergo a change, also becoming a responsible transition factor and thus broadening the investor base. While recognizing the key role of metals in the energy transition, we are aware that the need for supply cannot prevail over other social and environmental factors. At a more systemic level, the negative consequences of intensified extractive activities, such as human rights violations, loss of biodiversity, water contamination and greenhouse gas emissions, pose risks that could undermine the key objectives of the transition energy. Confidence in the sector’s ability to manage these externalities has so far been low and remains fragile. Since 2010, 630 complaints have been filed of human rights abuses in mines involved in the extraction of transition metals, including 91 in the last year alone. Low trust and weak reputation also apply to other stakeholders. Community opposition has led to serious delays in permit issuing times and in some cases, such as that of First Quantum Minerals in Panama, led to the closure of the mine (which in this case accounted for 40% of the group’s revenue) . For responsible investors, a fundamental dilemma arises: is it reasonable not to invest in the mining sector to support investments in the energy transition? In our opinion, we believe that investors have the power to seek the best results not by excluding companies, but rather by engaging with portfolio companies to avoid externalities and negative risks, as well as allocating capital to those mining companies that are results-oriented better.
Which scenario is the sector heading towards?
Recently – explains the analyst – we have participated in the multi-stakeholder dialogues of the OECD Annual Forum onresponsible mineral supply chains. The picture that has emerged is mixed: poor ESG practices, community complaints and permitting delays continue to erode the sector’s social license and its ability to expand. On the other hand, however, notable changes are also taking place: listed mining companies in the US and Europe report that sound ESG practices are essential for financing and market access. The latter is the result of greater investor scrutiny and a tougher regulatory environment led by the EU. For example, the Corporate Sustainability Due Diligence Directive (CSDD) requires companies to recognise, reduce and communicate their impacts on people and the environment, while the Battery Regulation forces end-users to carry out thorough supply chain due diligence, pushing end-users to scrutinize suppliers more . Companies across the entire supply chain will therefore need to invest in robust audit and process traceability capabilities to remain compliant.
Despite increasing regulation, “the picture remains complicated given the international natureand mining supply chains. As we have seen in the case of nickel, where cheaper Indonesian production – which in many cases was linked to deforestation and population displacement – has flooded the market, not all operators are held to the same environmental and social standards. Increased regulation could also reduce the interest of listed mining companies United States, UK and EU regarding projects in areas with higher social and environmental risks, in light of the higher ESG standards to which they must meet. This risks causing controversial outcomes, as the mining companies subjected to fewer controls could instead pursue similar project options”.
“It remains to be seen how supply chain regulation supports the harmonization of ESG principles, but as things stand we could see the development of a two-sided mining sector subject to very different standards, depending on who produces and where they are then produced. sold the products. Furthermore, regardless of investor intentions, the increasingly geopolitical nature of critical metals trading, combined with new regulatory frameworks, is resulting in an increasingly complex outlook for the sector. For this reason, today more than ever we believe it is essential to adopt careful due diligence and a targeted commitment in order to minimize the risk when investing in the mining sector“, he concludes.
