The relationship between the mining sector and investors fundamentally changed three years ago. In Brumadinho, Brazil, 270 people lost their lives when millions of cubic metres of toxic mining waste came crashing down at the Vale mine site. It was a horrific event that should never have happened. It has, however, been a catalyst for investors to rethink their role with a sector that is intimately linked to the materials our modern society and indeed the low carbon transition depends upon.
The inconvenient truth is that the mining industry must be at the heart of the low-carbon transition. Compared with fossil fuel technologies, low-carbon solutions are extremely mineral intensive. Just one 3MW wind turbine contains nearly five tonnes of copper wiring, two tonnes of rare earth elements, as well as 1,200 tonnes of concrete. Production of key minerals including graphite and lithium will need to ramp up by nearly 500 percent to have a 50 percent chance of keeping global warming below 2 degrees by 2100, according to World Bank calculations.
A failure to source and extract these minerals will mean perilous delays in lowering global emissions, and, according to February’s IPCC report, the end of any chance to secure a liveable and sustainable future for all. The bad news is that this is exactly the pathway some leading industry experts think we are hurtling down in the short to medium term: Simon Moores, CEO of Benchmark Mineral Intelligence (BMI), has coined it the “great raw material disconnect”.
Canary in the green coalmine
Raw material shortages and supply-chain challenges are already hampering EV production: the veritable canary in the green coalmine demonstrating just how vulnerable the low-carbon transition will be to changes in mining output. German automakers are sounding the alarm following the outbreak of war in Ukraine – with Russia, a major supplier of copper, nickel and platinum, facing heavy sanctions on exports which will affect both supply and price.
Though mineral demand forecasts vary dramatically depending on different global energy mix assumptions, shortages are predicted across the board for the ingredients of EV batteries and other energy storage solutions – the key drivers of projected mineral demand growth.
Lithium is facing its biggest ever shortfall this year, with BMI estimating a 26,000-tonne gap between supply and demand, rising to 300,000 tonnes by 2030. Cobalt, too, is expected to face a disconnect by 2030, with BMI forecasting just 305,000 tonnes supply compared with 382,000 tonnes demand. Graphite, the predominant anode of choice for EV batteries, is predicted to face supply shortages by as early as this year for battery-grade feedstocks, with demand for natural flake graphite exceeding supply by 370,000 tonnes by 2026. Obviously innovation and use of alternatives to these vital ingredients may help reduce this pressure, but that is a rather large bet to place on an already demanding global climate transition.
A sector steeped in ESG issues
The rise in the importance of ESG factors presents further supply challenges; while the nickel sulphate market is forecast to be in surplus until 2027, environmental and social concerns in supply chains could make much of the output unpalatable for Western battery manufacturers and automakers facing increased expectations to source responsibly from their customers and wider society.
This is by no means a nickel-specific concern; each mineral supply chain is steeped in its own ESG issues. Lithium mined in Australia, for example, typically amasses a huge carbon footprint when processed using coal-fired power in China, while in South America lithium evaporation pools use huge amounts of water in an already water-stressed region. For cobalt, production is plagued by human rights issues from hazardous working conditions to child labour, often arising within the informal mining sector of the Democratic Republic of Congo – the country currently producing two thirds of global cobalt supply.
As a consequence investors and industry need a clear line of sight not only on mineral availability, but also on where mines and refineries are going to be built and expanded, and what this will mean for communities and the environment.
There’s a strong argument for localising mineral supply chains: internationally scattered supply chains mean the lithium in an average EV will have travelled 50,000km before the car even hits the roads. But to do this means building a heavy industry of unprecedented scale almost from scratch – and finance will have to play a crucial role in supporting this. Wood Mackenzie has estimated that the copper industry alone needs around $325 billion in investment to plug a potential copper shortfall of 16 million tonnes by 2040. For less widely used minerals, many miners are of small to medium size and will require significant investment at higher risk to scale quickly.
Urgent investor action is needed
The urgency of the action needed should not be overlooked; a lack of investment in mining now will translate to shortages further down the line, and with some mines taking up to 15 years to reach production, supply will struggle to match demand.
Investment in new production capacity has traditionally been at the whim of mineral prices, but with markets in desperate need of new supply, investors should explore how to take longer term positions in anticipation of a turbocharged demand scenario.
In this context, investors and industry need to work together to map mineral availability and supply chains to work towards managing supply as well as environmental and social impacts. We need to establish extent to which government commitments, company transition plans and the reality of mineral availability are actually feasible – and where mineral pinch points could manifest as stumbling blocks for the global low-carbon transition.
This challenge is why this week the Church of England Pensions Board together with other leading investors will launch Mining 2030. Mining 2030 will develop an Investor Agenda addressing key challenges for the sector, including demand, automation, child labour, climate change, indigenous community rights, deep sea mining and the future workforce.
Our agenda, though, will be grounded in the lessons learnt from the intervention investors made following the Brumadinho disaster. Here together with investors with over $20 trillion in AUM we worked with multiple stakeholders to address a systemic challenge and create a new global standard on tailings management, to establish new corporate disclosure requirements and a global database and to work with the United Nations to establish an independent global institute to independently audit and verify at individual mine sites that the standard is being applied. While much work remains to be done on tailings, it does present a model for how investors can set the table to drive the change that is needed working practically with industry.
Whether we are invested in the mining sector or not we are all intimately connected to what it produces. To pretend otherwise is a falsehood. Investors are uniquely placed to approach systemic challenges and work with the sector to help it flourish and meet the demands of society and the low carbon transition.
Adam Matthews is chief responsible investment officer at the Church of England Pensions Board.
If your fund would like to join Mining 2030 please contact email@example.com.