Inflation, metals pricing and availability may challenge energy transition: Mines & Money

A sustained period of inflation and rising production costs are set to pressure supplies of key metals needed for the energy transition, and may lead to the need for governmental intervention, speakers at a Mines and Money conference said Dec. 1.

Mining sector inflation is typically higher than general consumer inflation rates - partly due to the rising capital intensity of bringing new capacity on stream due to ESG issues - and event participants were generally bullish on metals prices.

"We are likely to see higher rates of inflation than previously expected," Evy Hambro, managing director, global head of thematic and sector-based investing, fundamental equity, at asset manager BlackRock, told the London event, held in-person for the first time in two years. Prices for some metals have also gone up higher than the rate of inflation, bringing healthy margins to resource companies who have generally reduced their debts: however, costs could pressure supplies "and it won't be possible to transition without resources," the asset manager said.

"We will see decades of demand growth," Hambro said.

It's meanwhile "right that customers will pay differentiated prices... a premium" for low-carbon content metals that help end-users meet their needs, he said.

'Sustained' inflation seen

For Per Wimmer, CEO of investment bank Wimmer Financial, mining inflation is likely to be "sustained" rather than "transitory".

"We will only be surprised to the upside. But how quickly can the mining sector keep up with the pace?" Wimmer asked. He added his favorite metals from an investor's point of view are lithium, nickel – where he sees a strong deficit – copper, graphite and gold and silver. Gold and cryptocurrencies were seen by participants as set to benefit from inflation damaging "paper" currencies.

Prices for lithium – a key raw material for lithium-ion batteries used in electric vehicles - could retreat slightly from its current all-time highs of some $30/kg next year due to a flurry of new capacity set to come on stream, according to consultancy CRU Group's head of lithium research, James Jeary.

The recent lithium price spike is seen to have been led on by electric vehicle sales surpassing expectations, especially in China, where this year's EV sales are set to reach 3.3 million units, twice 2020 levels.

"The prices have attracted new supply into the [lithium] market, so there may be slight downside risk next year, but from a very high base," Jeary said.

However, "this will continue to be a hugely profitable industry for years to come," he said.

China is well on track to surpass its new energy vehicle sales target of 20% of its market by 2025 and should reach 30% market penetration by 2026, Jeary said. Together with a "massive upside" from President Joe Biden's energy transition policies for the US, where EV penetration could achieve 13% penetration by 2026, and a strong push on EV penetration in the EU, which hopes to reach 34% market penetration by 2026, means "the demand story [for lithium] is very strong with some constraining factors," he added.

Petur Georgesson, CEO, director and founder of TM2, a technology metals trading platform, told delegates that demand for battery metals "is going to vastly outstrip supply for a long time to come," while Michael Holloman, CEO and director of Missouri Cobalt, indicated there may be some doubt as to where the 100 or so gigafactories being built will be able to source their raw materials.

Government finance needed

Vera Ivanova, investment director of AMED Funds, a private equity company focused on minerals in Africa, admitted she does not know where all the minerals needed will come from.

"The single biggest risk is overprojection," Ivanova said. "Private equity funding alone won't be enough – we need to look at governmental development finance also" [for mining projects].

Wimmer added that few people in the industry realize "the speed of our electric future depends on the politics of the DRC," referring to the fact the Democratic Republic of Congo is today responsible for more than 60% of the world's supplies of cobalt, another key element in the production of EV batteries.