The Long Term Outlook for Metals is Bright, But Miners Aren't Betting on It

The Long Term Outlook for Metals is Bright, But Miners Aren't Betting on It | OilPrice.com

Metals are the new oil and gas when it comes to the energy transition. Making the vision of an emission-free economy running on wind, solar, hydrogen, and batteries requires massive amounts of certain metals and minerals labeled as critical—and with a good reason. Without these metals, there will be no transition. And now, many of them are facing critical shortages.

Earlier this month, BloombergNEF estimated that the mining industry needs fresh investments of some $2.1 trillion to secure the supply of critical metals and minerals. Otherwise, the transition forecasting arm of Bloomberg said, the cost of the transition is set to tick even higher than it already is.

"The report indicates that key energy transition metals such as aluminum, copper and lithium could face deficits in primary supply this decade – some as soon as this year," BloombergNEF wrote, adding that per its estimates, the world could need 3 billion metric tons of metals between now and 2050 in order "to properly build out low-carbon solutions such as electric vehicles, wind turbines and electrolyzers." What's more, this is only half of the amount needed to be produced by 2050 in order to succeed in the net-zero vision.

Such an outlook, while looking rather grim to transition architects, represents an opportunity for investors. Indeed, Reuters columnist Andy Hume wrote this week that the shortage predictions should bring big investors back to metal funds—after flows into commodity funds declined considerably over the last ten years.

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Yet there may be a problem with that. The outlook for metals and minerals is indeed as bullish as they get. That outlook, however, has failed to motivate miners to expand production of those metals in any meaningful way. On the contrary, that outlook—repeated again and again by various forecasting outlets—has led to price slumps.

It is a rather paradoxical development, but demand expectations for elements such as copper and lithium have been pumped up so high that when that bombastic surge in demand failed to materialize as soon as expected, prices slumped and stayed slumped. The situation is similar to the Chinese oil demand refrain and international prices. Still, the bullish forecasts continue.

According to Hume, copper, lithium, and other transition metals could become as essential for the economy of the future as oil is to today's economy. They could be, he wrote, as "powerful future drivers of inflation as oil and gas are in today's carbon-intensive economy." If investors help make them so by piling up into mining commodities.

However, news of falling EV sales almost everywhere except China has not helped the bullish metals case. EVs have been one of the biggest drivers of future copper demand and perhaps the biggest driver of lithium demand—and forecasts have invariably been bullish. Yet reality has failed to meet expectations, disappointing investors who bought the predictions and leading to a price slump in both commodities. In an ironic twist of events, this has discouraged miners from committing to output expansions in what increasingly looks like a vicious circle for transition industries.

According to BloombergNEF, copper and lithium could swing into a supply deficit as early as this year—and so could steel and aluminum. Yet Australia's lithium miners are struggling to keep their mines operating because of the slump in lithium prices over the past year. The BBC reported last month that many are losing the battle and shutting mines down as EV sales decline and the supply of lithium remains above demand.

Copper has been doing better, with the price rising earlier this month after China announced economic stimulus measures. The country is the biggest consumer of the metal—and the biggest transition market. Yet, copper prices may yet reverse course, as oil did, after the effect of the stimulus announcement fizzled out. Miners, meanwhile, are warning about heightened price volatility in the segment and blaming governments for being slow to issue fresh mine permits.

In steel, we once again have bombastic predictions, and reality has yet to catch up with them. That's largely because the predictions make certain assumptions that keep failing to materialize despite strong government support. The surge in EV sales that never happened is one example of such assumptions. The expectations of an equally strong surge in—unopposed—wind and solar deployments was another of these assumptions. A surge there has been indeed, but it has not been unopposed.

It is a complicated landscape for investors to navigate. Of course, they could put their trust in predictions coming out of BloombergNEF and the International Energy Agency, risking a nasty surprise when demand for EVs yet again fails to live up these forecasters' expectations. Or they can choose the cautious wait-and-see path. It is not the best path from the perspective of transition architects, but after a host of bullish predictions failed to come true investors were bound to start asking questions and having doubts about the whole transition story.

By Irina Slav for Oilprice.com

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