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Thursday, 28 September 2023 10:57

McKinsey: Climate targets threatened by reduced funding for metal and mineral mining

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Report reveals looming shortages of rare-earth metals and minerals key to the energy transition as low commodity prices cause investors and mining firms to cut spending on critical mining projects

New analysis released today by McKinsey & Company indicates the world could see significant shortages of rare earth metals and minerals critical to the energy transition by 2030 due to a lack of funding for new mining projects. Soaring demand is creating a major trading opportunity with McKinsey analysis revealing a more than 170% growth in commodity trading value pools for metals in just 3 years.

The report, titled The Trading opportunity that could create resilience in materials reveals that surging interest rates and a reduction in available finance has seen mining companies cutting investment, with sector spending in aggregate falling to around $40 billion in 2022 despite the recent uptick from 2020 lows, thus jeopardizing the energy transition. 

2023 09 28 105647The report indicates imminent shortages of 20-50 percent across some rare-earth metals and minerals essential for renewables, power grids and EV batteries by 2030, driving demand for huge investment in new reserves.

Roland Rechtsteiner, Partner at McKinsey, said: “Our analysis shows commodity trading pools have nearly doubled year over year, reaching nearly $100 billion in 2022 and metals and minerals will make up an increasing share of the value pool in the coming years. Traders can capitalize on this opportunity by supporting increased liquidity and price discovery in rapidly evolving metals and minerals markets, providing ESG blending solutions tailored to each market and boosting risk management capabilities to provide these services for counterparties including new market entrants.”

Yet investors are currently reducing funding for new mining projects due to low commodities prices and long lead times for new mines, exacerbating supply chain shortages for green technologies. McKinsey notes that commodities are currently significantly underpriced despite massive demand with the Goldman Sachs Commodity Index only just starting to rebound from all-time lows vs the S&P 500.

It is anticipated that EV batteries and chargers alone may consume over 50 percent of all available cobalt and rare-earth elements and 36 percent of nickel resources by 2030. McKinsey highlights that recycling could only account for 10 percent of supply for minerals such as copper, lithium, and nickel by 2040 and potential substitute materials are still nascent.

Spencer Holmes, Associate Partner at McKinsey said: “There are many hurdles to developing new metal and mineral reserves with investors favoring other industries, and many proposed mines involving new technologies and inexperienced companies as well as ESG and permitting barriers. Mines take an average of up to 15 years to become operational and some projects planned today wouldn’t begin production until about 2040.

“Large energy firms could help address the renewable supply chain shortage at source by expanding into metals and minerals. Traders could also accelerate development by pre-financing junior mines and helping producers gain access to markets. Metals and minerals producers could also encourage long-term supply deals to pre-finance projects.”

McKinsey suggests three paths to help companies shore up their positions and find new opportunities amidst the growing uncertainty and complexity of commodities markets.

  1. Traders: Traders can help address metals and minerals shortages by supporting liquidity and price discovery in rapidly changing metals and minerals markets, providing ESG blending solutions tailored to each market, boosting risk management capabilities to provide these services for new market entrants and directly investing their own capital in alleviating the supply shortage
  2. Metals and minerals producers: Producers could negotiate long-term supply deals to pre-finance new mining projects, customize high quality metals to specific customer segments, explore new product differentiators (particularly green product price discovery) understand supply chain vulnerabilities such as over-reliance on some countries for solar parts and use trading to optimize their portfolio management
  3. Major energy companies: Big energy firms could expand into the supply chain to alleviate the shortage. For example, energy firms could harness their expertise to expand into metals and minerals

To read McKinsey’s findings in detail, click here.  

About McKinsey & Company: McKinsey & Company is a global management consulting firm committed to helping organisations create Change that Matters. In more than 130 cities and 65 countries, our teams help clients across the private, public, and social sectors shape bold strategies and transform the way they work, embed technology where it unlocks value, and build capabilities to sustain the change. 

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