Ground net zero?

With demand for base metals and rare earths forecast to remain strong as the world prepares for decarbonisation, supply chain hurdles have become a prominent issue again. Supply disruption during the pandemic, since compounded by Russia’s war on Ukraine, is forcing Europe to source alternative metals and minerals supply, and reliance on China for these materials – particularly for refining – is increasing. 

These materials are vital to reach Paris climate goals. As Julian Kettle, vice chairman of metals and mining at Wood Mackenzie, tells TXF: “We do not yet have a green infrastructure that is self-sustaining. We have to build it first, and then it can be self-sustaining. Only at this point can the energy used to build infrastructure be green, but right now, we need carbon-intensive energy to help produce green energy sources and green infrastructure.”

So, emissions from the metals and mining sectors are forecast to continue to climb – at least until the relevant green infrastructure is built – and supply squeezes are further complicating things in the short-to-mid-term. “Sanctions have meant that Russian aluminium, which is about as green as it gets, is being replaced by aluminium supply from China, which is about as carbon intensive as it gets”, says Kettle. And on top of this, there are additional emissions associated with the longer-haul journeys that supply is making, from sourcing in Africa, to refining in China, to delivery in Europe. 

Lack of investment stands in the way 

Metals and mining is an extremely important sector for energy transition, despite various associated ESG issues – not just around carbon emissions, but also social issues around artisanal/unregulated mining. 

But the industry has been underfunded over the past decade or so. Investors burnt during the last boom have been replaced with a new wave of dividend-driven investors focussed on short-term returns rather longer-term investment. Consequently, an estimated $400 billion of additional investment in critical minerals supply is needed this decade if the world is to succeed in meeting Paris climate goals, and emissions will only continue to soar in the process.

The issue of lack of liquidity is something that has hit all sectors and jurisdictions in the commodities industry in the past few years, impacting almost all players. And although the trade finance gap is still vast, with no widespread solution in place, the industry has begun to diversify further away from traditional financing from banks. 

“We are not just looking at traditional balance sheet finance, or project finance. There are now a lot of traders providing capital for investment in exchange for offtake”, Kettle explains. An example of this is DRC-based copper and cobalt producer Shalina Resource’s $600 million financing energy trader Trafigura, under which Trafigura will receive 100% of the mine’s offtake for the duration of the loan’s maturity period. According to Kettle, traders which put up loans of this type of structure often market 100% of the offtake, even if they only put up 50% of the capital. “It’s a cheap way of getting access to market control”, he adds. 

So, is there potential for energy majors, who have been profiting from high volatility and the industry’s ‘flight to quality’, to step in and give the metals and mining sector the boost it needs to reach Paris climate goals? “The oil and gas industry will not just to disappear, but at some point, the world is going to have to start tilting away from investing in oil and gas, and ultimately, is going to have to invest more into metals and mining”, Kettle tells TXF. “And from a logistical perspective, the energy majors are practiced in discovering and developing, working in high-risk countries, and maintaining good government relationships.” 

Could the majors finance the miners?

Many private investors in the metals and mining sectors are new to the world of commodities and do not quite understand the cyclic nature of the industry, which is one factor that has driven the lack of longer-term investment in the space. Particularly when considering that the time between mine discovery to delivery is often around seven years, it is vital that investors have a good understanding of the sector, rather than putting short-term returns before long-term development of the space. 

On top of this lack of industry-specific investor knowledge, the pandemic and growing geopolitical tensions have sparked an ever-growing uncertainty within the investment community. “This has resulted in them shortening their time horizons and reducing their risk allocation to offset these market conditions”, Kettle adds, “Once the pathway is clearer, investor ability and willingness to mobilise capital will increase. But this in itself creates an issue, because it is likely that investors will all want to move at the same time”, adds Kettle. This opens a whole new can of worms, as the surge of pressure on mining projects will create issues around constraints, delays, and ultimately inflation, as trading prices will drop, and cost of projects will rise. In other words, those willing to take on the risk that investors are currently shying away from will not only profit from being early movers, but will also be more likely to benefit from their supply coming online while prices and demand are still extremely high. 

For energy majors, which have long experience of the volatile nature of the commodities industry, this could be the perfect time to invest in metals and rare earths mining, in effect the key materials for developing renewables infrastructure, particularly as Paris climate goals loom in the background of every discussion. “They could bring their experience and ability to do business to the mining sector, whilst achieving returns for shareholders which they won’t necessarily be able to deliver through renewables”, says Kettle. In short, the potential role for majors in energy transition could extend to the renewables infrastructure supply chain rather than just renewable energy generation.