The next commodities supercycle

As governments set targets for reductions in greenhouse gas emissions, the race to secure the resources required to produce clean energy is fiercely competitive. Building assets such as solar photovoltaic plants, wind farms and electric vehicles requires more minerals than their fossil fuel-based counterparts, the International Energy Agency (IEA) points out. Producing a typical electric car, say, requires six times the mineral inputs of a conventional vehicle, while it takes nine times more mineral resources to build an onshore wind farm than a gas-fired power plant.

Demand for key energy transition minerals – copper, lithium, nickel, cobalt, graphite and rare earth elements – rose by up to 30 per cent last year alone, IEA data shows. Inevitably, that means stiff competition for resources. “Today’s supply and investment plans for many critical minerals fall well short of what is needed to support an accelerated deployment of solar panels, wind turbines and electric vehicles,” the IEA’s Executive Director, Dr Fatih Birol, has warned.

“We are witnessing a fundamental structural change in the world’s energy policy,” says Tilmann Galler, a Global Market Strategist at J.P. Morgan Asset Management. “That has huge consequences for global commodity markets.” The average price of seven metals used to manufacture offshore wind turbines rose by 93 per cent between January 2020 and 2023, according to Energy Monitor.

In 2023, by contrast, the price of critical minerals plummeted; battery materials saw especially large declines, with lithium spot prices falling by 75 per cent and cobalt, nickel and graphite dropping by up to 45 per cent. As mines rushed to open up new supplies and the global economy slowed, the demand-supply imbalance tilted dramatically. Looking through such turbulence, however, the direction of travel is clear, argues Galler. “We see a good chance of a new global supercycle in commodities,” he says. “It won’t be a broad supercycle, but one that is focused on these critical minerals.”

Investors see potential

Investors, naturally, see opportunities here. Pension funds, for example, have increased their exposure to this part of the natural resources sector. Sustainable investment funds that once rejected shares in mining companies are now reassessing, particularly when it comes to mining companies extracting clean energy minerals. J.P. Morgan Asset Management has published criteria for including mining sector holdings in its funds range.

The key will be to ride out the bumps of energy transition. “We are not concerned there isn’t enough of this stuff in the ground – it’s a question of how we get it out in time,” says Mike Hemsley, Deputy Director of the Energy Transitions Commission. “We are going to see real pinch points in [the] supply of materials such as copper and nickel.”

Scaling up the supply is a real challenge. While lithium production has increased by 180 per cent since 2017, sales of electric vehicles, which need lithium in their batteries, are up by around 600 per cent. Another concern is that clean energy mineral sources are concentrated in a handful of countries. Western nations trying to reduce their dependence on Russian oil assets, for example, may find themselves just as dependent on China for rare earths, graphite and zinc. And not all resource-rich countries are politically stable. The Democratic Republic of Congo, for example, a crucial source of cobalt, has been wracked by civil war.

Backing the solutions

Investors focus on industries and companies managing these problems; diversity of supply can be addressed through exploration, for example. Recent finds range from rare earths in Arctic Sweden to lithium deposits in Maine in the US. “There is an ambition to have more of these materials both mined and processed in the EU, though there hasn’t been much action yet,” says Hemsley. “The US is moving more quickly, as the new lithium find in Maine underlines.”

Another possibility is to use alternative materials. In China, for example, Yiwei and JMEV are producing electric cars, powered by sodium batteries, rather than a conventional lithium product. Recycling will also play a role; unlike fossil fuels, which are simply burned, metals and minerals can be reused when assets reach the end of their life cycle.

Nor does stepping up supply of these commodities necessarily mean having to sacrifice sustainability and responsibility goals. Policymakers and regulators are working to improve transparency, with multiple groups holding both countries and companies to account. Moreover, if Western governments expand supply closer to home, they can demand higher labour and environmental standards. One plank of the Biden Administration’s Inflation Reduction Act was support for near shoring and “friend-shoring” of the clean energy supply chain – that is, moving supply chains nearer, or at least to allied countries. The EU’s Critical Raw Materials Act carries similar provisions.

All of this, however, will rely on new capital and investment. The Energy Transitions Commission estimates that, since 2012, the world has been investing an average of $45bn–$50bn a year in metals mining (excluding the gold and iron sub-sectors, less relevant to clean energy), but that this now needs to increase to $70bn a year.

Still, the prize for those prepared to provide this capital is valuable. The IEA says the global market for clean energy minerals was worth $320bn in 2022 but that it will more than double to $770bn by 2040. “That makes for constant upwards pressure on those critical minerals for energy transition,” adds Galler. “It won’t be a linear market, because demand will fluctuate in line with economic cycles, but prices are likely to keep going up.”