Metals of the Future 2.0: How the Energy Transition Is Transforming the Metals Markets
In the two years since we published our research on electric vehicles (EVs) and metals, we’ve seen a dynamic metals market unfold before our eyes. The copper, lithium, and nickel markets are undergoing a rapid transformation, driven by the green energy revolution, which has spurred investments and innovation to meet the growing demand of EVs and renewable energy. In this paper, we explore how supply and demand for some of these “commodities of the future” have been shaped by the transition to a low-carbon future. We also explore governmental responses from emerging markets (EMs) to these shifting dynamics.
December 2023
Corporate Credit Analyst
Alexandra Symeonidi, CFA
In the two years since we published
our research
on electric vehicles
(EVs) and metals, we’ve seen a dynamic metals market unfold before
our eyes. The copper, lithium, and nickel markets are undergoing a
rapid transformation, driven by the green energy revolution, which has
spurred investments and innovation to meet the growing demand of
EVs and renewable energy. In this paper, we explore how supply and
demand for some of these “commodities of the future” have been shaped
by the transition to a low-carbon future. We also explore governmental
responses from emerging markets (EMs) to these shifting dynamics.
Metals of the Future 2.0: How the Energy
Transition Is Transforming the Metals Markets
EMERGING MARKETS DEBT
Investment Management
active.williamblair.com
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METALS OF THE FUTURE 2.0: HOW THE ENERGY TRANSITION IS TRANSFORMING THE METALS MARKET
Demand Dynamics
The energy transition from traditional fossil fuels to
renewable resources, as well as the electrification of several
global economic sectors, is now evident in the demand for
copper, lithium, and nickel. Investments in electric grids
worldwide have accelerated in the last couple of years as a
result of investments in renewable power systems and the
infrastructure needed to support the electrification
of transportation and other sectors.
Copper
According to the International Energy Agency (IEA),
global investment in electricity grids increased around
8% in 2022. China has led this growth, with investments
in grid and infrastructure up 28% year-over-year from
January to October 2023. Chinese demand for copper
now constitutes 60% of the world total. While demand for
all copper uses is higher than historical records, demand
for wire, which has multiple uses in the grid and EV
infrastructure, has significantly outperformed demand
for other copper uses in China.
In Europe, EV sales continue to advance, with EV
registrations recording a whopping compound annual
growth rate (CAGR) of 55% from 2017 to 2022. Grid and
infrastructure investments, coupled with EV adoption,
constitute the largest consumers of copper worldwide,
strengthening copper demand resilience in the face of
current economic challenges.
Sources: Bloomberg and William Blair, as of October 31, 2023.
EXHIBIT 1
China Electricity Investments, Grid and Infrastructure (in Billion CNY)
1,400
1,200
1,000
800
600
400
200
0
2017
2018
2019
2020
2021
2022
First 10 Months,
2022
First 10 Months,
2023
WILLIAM BLAIR INVESTMENT MANAGEMENT
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3
Demand Dynamics
(continued)
EXHIBIT 2
China Copper Demand (Uses)
Sources: International Energ y Agency (IEA) and William Blair, as of 2022.
EXHIBIT 3
EV Registration in Europe
Sources: Bloomberg and William Blair, as of August 31, 2023. Indexed to 100 in December 2020.
180
170
160
150
140
130
120
110
100
90
80
Wire (Grid)
Rod (Grid/Electric Applications)
Plate and Sheet (Industrial/
Consumer Durables)
Tube (Construction)
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
2017
2018
2019
2020
2021
2022
CAGR 55%
2/21
3/21
4/21
5/21
6/21
7/21
8/21
9/21
10/21
11/21
12/21
1/22
2/22
3/22
4/22
5/22
6/22
7/22
8/22
9/22
10/22
11/22
12/22
1/23
2/23
3/23
4/23
5/23
6/23
7/23
8/23
9/23
10/23
11/23
4
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METALS OF THE FUTURE 2.0: HOW THE ENERGY TRANSITION IS TRANSFORMING THE METALS MARKET
Demand Dynamics
(continued)
Lithium
Among all commodities of the future, lithium has probably
undergone the greatest transformation. The electrification
of transportation has driven a colossal shift in the demand
composition for lithium, which had a CAGR of 23% from
2017 to 2022. EV batteries are the biggest contributor to
this dynamic, now representing more than 50% of total
demand for lithium (up from about 30% in 2017). Other
uses of lithium include consumer electronics (which
use lithium-ion batteries), glass making, ceramics, and
pharmaceuticals.
EXHIBIT 4
Lithium’s Share of Clean Energy Demand
Sources: International Energ y Agency (IEA), GlobalData, and William Blair,
as of 2022.
Other Demand
Clean Energy Demand
30%
56%
2022
2017
“ “ Among all commodities of the future,
lithium has probably undergone the
greatest transformation.
”
Alexandra Symeonidi, CFA
WILLIAM BLAIR INVESTMENT MANAGEMENT
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Demand Dynamics
(continued)
Nickel
Nickel demand has been accelerating in the last three
years. It grew 11% in 2022 and is expected to grow another
14% in 2023. For context, demand growth for most
industrial metals is comparable to global annual gross
domestic product (GDP) growth, which has been much
lower than the double-digit growth experienced in nickel.
This growth is a result of nickel being used as a component
of EV batteries. The composition of nickel demand has
been changing too. Clean energy now constitutes 16% of
total demand, up from just 6% in 2017.
EXHIBIT 5
Nickel’s Share of Clean Energy Demand
Other Demand
Clean Energy Demand
6%
16%
2022
2017
Sources: International Energ y Agency (IEA), GlobalData, and William Blair,
as of 2022.
Sources: Statista and William Blair, as of 2022 (2023 is estimated).
EXHIBIT 6
Global Nickel Demand (In Thousand Tonnes)
4000
3500
3000
2500
2000
1500
2019
2020
2021
2022
2023E
CAGR 10.2%
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METALS OF THE FUTURE 2.0: HOW THE ENERGY TRANSITION IS TRANSFORMING THE METALS MARKET
The supply response to the very pronounced demand
shifts observed in these metals has been remarkable.
Automakers, equipment manufacturers, and battery cell
makers all want to get involved in the value chain of these
critical metals. As we illustrated in our previous paper,
demand for these metals is expected to accelerate even
further, raising questions about scarcity and the ability
of supply to meet demand.
Copper
While copper miners recognize copper’s importance
for green technologies, production is challenging.
Copper miners have faced increased regulatory scrutiny,
aging assets, declining grades (the concentration of
copper in the ore being mined), and changing weather
patterns, including pronounced droughts in Chile and
flooding in Zambia. Global copper supply has grown only
in the low-single-digit levels over the past three years,
with new projects in Peru and the Democratic Republic
of Congo mostly offsetting lower production in the
world’s largest copper producing country, Chile. This
has resulted in market deficits over the past three years.
In 2023, a surplus is expected due to lackluster demand
from developed markets.
Despite these dynamics, copper miners are ramping
up investments to fulfil the high anticipated demand.
Capital expenditures in the 10 largest miners, which
represent about 44% of global production, increased 13%
in 2022 and are expected to grow another 14% in 2023.
Supply Dynamics
EXHIBIT 7
Copper Market Balance and Investments
Sources: International Wrought Copper Council, Nornickel, Bloomberg, and
William Blair, as of 2022 (2023 is estimated).
200,000
100,000
0
-100,000
-200,000
-300,000
Market Balance in Tonnes
Annual Growth of Capital
Expenditures, Top 10
Copper Miners
2020
2021
2022
2023E
-12%
-18%
13%
14%
“Copper miners have faced increased
regulatory scrutiny, aging assets,
declining grades and changing weather
patterns, including pronounced
droughts in Chile and flooding
in Zambia.
”
Alexandra Symeonidi, CFA
WILLIAM BLAIR INVESTMENT MANAGEMENT
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Lithium
The supply of lithium is highly concentrated in a few
locations and companies. The two largest lithium
operations in the world accounted for 43% of total lithium
production in 2022. Still, lithium supply has increased to
meet the growing use of rechargeable lithium-ion batteries,
which are widely used in consumer electronics, EVs, and
energy storage systems. A brief decline of lithium carbonate
prices was observed in 2020 as a result of supply-demand
dynamics, but prices peaked in 2022. Thus far in 2023,
lithium production has surpassed consumption, resulting
in an abrupt price correction from all-time highs. Lower
EV sales, inventory build-up in the energy storage sector,
demand uncertainty in China, and new supply coming
online faster than anticipated are key reasons.
An acceleration in demand growth is anticipated for
lithium, prompting producers to expand their investments
in the sector. Capital expenditures in the five largest lithium
producers worldwide, which account for 65% of total
production, grew 53% in 2022 and are expected to pick
up another 66% this year.
Supply Dynamics
(continued)
Sources: International Energ y Agency (IEA) and William Blair, as of 2022.
EXHIBIT 9
Lithium Demand, Supply, and Market Balances (Thousand Tonnes)
140
120
100
80
60
40
20
0
Demand (Left A xis)
Supply (Left A xis)
Market Balance (Right A xis)
20
15
10
5
0
-5
Sources: Bloomberg and William Blair, as of 2022 (2023 is estimated).
EXHIBIT 8
Capex Growth in the Top Five
Lithium Producers
2016
2017
2018
2019
2020
2021
2022
2023E
66%
53%
-30%
41%
19%
132%
75%
19%
2016
2017
2018
2019
2020
2021
2022
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METALS OF THE FUTURE 2.0: HOW THE ENERGY TRANSITION IS TRANSFORMING THE METALS MARKET
Supply Dynamics
(continued)
Nickel
Alongside lithium, nickel has probably seen the largest
expansion in production volumes compared to other
metals. Since 2019, Indonesia, which accounts for 50%
of global nickel ore production, has rapidly developed
domestic processing facilities in an attempt to capture
more value from the metal and to become a global EV
supply-chain hub. According to government estimates,
the value of processed nickel products in 2022 was
$30 billion, 10 times higher than it was four years ago.
Indonesia increased the number of operating smelters
from 15 in 2021 to 43 this year; another 28 smelters are
under construction and 24 are in the planning stages.
It’s worth highlighting China’s contribution to this
expansion. The country has made investments of around
$30 billion, and two of the largest nickel industrial hubs
(the Morowali Industrial Park and the Weda Bay Industrial
Park) are operated by the same Chinese company. This
investment stands out as one of the largest under China’s
Belt and Road Initiative (BRI).
This vast increase in smelting capacity led Indonesia
to become a net importer of nickel ore for the first time
in its history in 2023. However, the most significant
consequence of this expansion is that total primary nickel
production has surged to peak levels leading to market
imbalances. The International Nickel Study Group expects
this year’s surplus to be the largest in the last decade.
EXHIBIT 10
Nickel Market Balance and Price
300
200
100
0
-10 0
-200
Balance in Thousand Tonnes (Left A xis)
Price in Dollars per Tonne (Right A xis)
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Sources: International Nickel Study Group, Bloomberg, and William Blair, as of 2022. Balance (left axis) is in thousand tonnes. Price (right axis) is in dollars per tonnes,
year-to-date.
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023E
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Countries in which mining for the metals of the future
has made up a significant part of GDP have taken an active
stance toward the development and commercialization of
these resources. Several EM governments recognize the
value of these metals to future technologies and aim to
capture a larger share of a growing pie. Below we highlight
such cases.
Copper
Chile, the top producer of copper, finalized an amendment
to its mining tax regime in 2023. The regime, now royalty-
based, will increase taxes from 5% to 14% of operating
profits to 8% to 26% of operating profits for large producers.
The new royalty will also have an ad-valorem component of
1%. While the calculation of taxable income has changed,
the new royalty regime promises to increase state revenues
from the sector, especially in a high-price environment.
In 2019 Zambia revised its royalty rates from 4% to 6%
of operating profits to 5.5% to 10% of operating profits,
depending on prices. Copper exports account for as much
as 12% of Zambia’s GDP, making the resource crucial to its
economic development.
Lithium
China’s push to become the world’s top supplier of
solar cells, lithium-ion batteries, and EVs, is driving
the need for the country to secure a large share of
the lithium supply chain. Indeed, China has invested
billions to acquire stakes in lithium mines in Latin
America and most recently Africa. According to
Benchmark Minerals, two-thirds of forecast lithium
production will be owned by China in 2030.
EM Resource Nationalism
Chile, which is home to the world’s largest lithium reserves,
announced earlier this year a strategy to nationalize its
lithium industry. The strategy would allow the state to lead
lithium mining and processing projects through national
companies, thereby ensuring a larger revenue share to
the state and better environmental conditions. Under the
current regime, independent lithium producers are leasing
mineral concessions from a governmental organization
called Corporación de Fomento de la Producción (CORFO).
These leases contributed more than $5 billion dollars to the
Chilean treasury in 2022, about 2% of the country’s GDP.
But Chile is not the first country to nationalize its lithium
resources. Earlier in 2022, Mexico declared lithium
as a strategic mineral, meaning that the exploration,
exploitation, and end-use of lithium will be an exclusive
right of the state. The country has set up a national lithium
company that will seek to establish Mexico as a prominent
lithium mining nation.
Nickel
Perhaps another example of resource nationalism has been
the ban on exports of nickel ores from Indonesia. Initially
implemented in 2014 and reinforced in 2020, the ban
sought to develop domestic nickel and EV supply chains.
Part of the strategy to develop the domestic market is tax
incentives to nickel processing facilities. The government
has recently revoked the 10-year tax holiday for low-grade
producers to encourage more investment in downstream
processes and battery-grade nickel manufacturing.
In Panama, the mining concession contract for the country’s
largest copper mine recently sparked unprecedented
protests due to its impact on the environment and the
distribution of profits between the mine operator and the
state. In late November, Panama’s supreme court ruled
the contract unconstitutional, while the mine, which
contributes 3% to 5% to the country’s GDP, halted
operations due to blockades. Earlier in the same month,
Panama’s Congress banned new mining concessions
and extensions of current concessions. Certainly, this
exemplifies a case of resource nationalism, in which a
country asserts control over its natural resources.
“ “ According to Benchmark Minerals, two
thirds of forecasted lithium production
will be owned by China in 2030.
”
Alexandra Symeonidi, CFA
10
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METALS OF THE FUTURE 2.0: HOW THE ENERGY TRANSITION IS TRANSFORMING THE METALS MARKET
We believe the likelihood of enduring demand for metals
of the future due to the energy transition bodes well for
market prices. For the corporate credit investor, this
should translate into robust credit fundamentals, such as
margins and cash flows.
Moreover, many metal companies in the EM debt universe
have reduced leverage, which could help them withstand
metal price volatility.
Maturities are addressed well in advance, while we have
noticed an investor preference for debt issued by “future
metals” companies in contrast to other metals producers.
As we have highlighted, companies rich in future metals
could increasingly benefit from the production and sale of
these minerals.
For the countries mentioned above, the metals sector
should continue to be a strong driver of GDP and attract
foreign direct investment (FDI).
We believe the export value and tax revenue from these
metals could increase due to higher production and a
resilient price outlook, and over time this should lead to an
improvement in sovereign credit fundamentals, which
is appealing to the sovereign investor.
Investment Implications
“We believe the export value and tax
revenue from these metals could
increase due to higher production and
a resilient price outlook, and over time
this should lead to an improvement in
sovereign credit fundamentals, which
is appealing to the sovereign investor.
”
Alexandra Symeonidi, CFA
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