Mining has a reputation as a cyclical sector, expanding when economic growth is buoyant and slipping as economies contract. However, today, the dynamics of the mining sector are more complex and nuanced, with the energy transition, shifting geopolitics and even the artificial intelligence (AI) revolution changing the demand patterns for mined commodities.
Historically, commodity prices have moved with economic growth. Buoyant growth tends to lead to more investment in new buildings, machinery or products, all of which creates demand for materials, such as lithium, or copper.
Mining companies would often lean into that demand, creating new supply. However, too often, demand would then reverse as economies weakened, leaving mining companies with an excess. This created boom and bust cycles.
Today, the picture is different. The transition away from fossil fuels to low-carbon energy sources is creating new sources of demand. This transition is supported by vast government investment, including the Inflation Reduction Act in the US, the Joe Biden administration’s flagship climate legislation, which directed $369bn in clean energy tax credits and funding for climate and energy programs. In Europe, the RePower EU Plan also allocates significant funding for clean energy infrastructure.
There are new, structural sources of demand, which are not solely dependent on economic growth. This transition requires a huge range of mined commodities.
It is only through mining companies that there will be the copper needed for electrification, the metals needed to update electricity grids across the world, the lithium for use in batteries and the iron ore for the production of steel needed for wind turbines.
A recent report from the Energy Transitions Commission found that annual demand for lithium, which is necessary for batteries and electric vehicles (EVs), could increase by up to seven times by 2030. Copper demand is estimated to increase by around 50%.
It also points out that it takes many years to bring new supply on stream – up to 20 years for a new copper mine. This will bring steady, less-cyclical demand for certain critical commodities.
Geopolitical tensions are also shaping demand for commodities. There are multiple geopolitical pressure points across the world, which are pushing countries to achieve energy security and independence.
This is also helping to galvanise the energy transition, and pushing countries to spend more on energy infrastructure, with a knock-on effect for commodities.
Raw materials are needed to shape the future
Technological advances also require mined commodities to facilitate them. AI supremacy requires computing power, which is creating a proliferation of data centres. These require raw materials, from copper, silicon and lithium for the servers, to the aluminium and steel of the actual buildings that house them.
In a recent Turner and Townsend report, 95% of respondents said material shortages had caused delays to data centre construction over the past 12 months. As countries battle to achieve technological supremacy and harness data effectively, we are likely to see increasing competition for the resources that make this possible.
These changing demand dynamics come against a backdrop of constrained supply. While there are exceptions, most mining companies have not increased capital expenditure to the same level as in previous cycles.
Attempts to expand the supply of copper, for example, have been largely unsuccessful, while iron ore supply remains tightly controlled. Companies have been disciplined in their capex.
We are investing in companies producing those commodities with a favourable backdrop that transcends cyclical considerations. These are commodities where governments and companies are not just spending because the economy is expanding, but because changes are necessary for environmental protection, or to remain competitive in a changing world.
This means mining is not as dependent on economic growth as it has been in the past.
Olivia Markham is co-manager of the BlackRock World Mining Trust. The views expressed above should not be taken as investment advice.