Iron ore, copper and lithium – what’s next and the investment opportunities

The energy crisis seen over 2022 and a global push toward net zero by 2050 both support the same message – a need to decarbonise, lower costs and boost resilience.

Reaching those targets means rethinking the way we live and work, while improving technologies to enable that to happen. That means a shift in the demand dynamics for a host of metals we need to expand renewable energy sources, evolve battery technology, and build green infrastructure.

For miners, there’s an opportunity.

Here’s a closer look at two metals and one mineral that are essential for the energy transition, with a focus on what the major miners are saying about them.

This article isn't personal advice. If you’re not sure if an investment is right for you, please seek advice. Investments can fall as well as rise in value, so you could get back less than you invest.

Iron ore, and the iron extracted from it, is as a key ingredient in the production of steel – an essential component in the build out of renewable infrastructure.

Copper boasts the best thermal and electrical conductivity of any non-precious metal. It’s essential for creating efficient and reliable energy solutions.

Lithium is a key component of the widely popular lithium-ion batteries, used in the production of electric vehicles (EVs) and energy storage.

Iron ore

Iron ore, and by extension steel, might not be the first material you’d point to when thinking about decarbonisation. But the reality is, steel’s going to be essential in the build out of renewable infrastructure – a single wind turbine can contain over 300 tons of steel.

2022 was an eventful year for prices. Having reached record highs in 2021, prices came under pressure from all angles last year. Steel production from China, the world’s largest consumer of iron ore, was constrained by ongoing lockdowns and issues in the property sector.

More broadly, higher inflation across the globe meant costs for steel manufacturers and infrastructure projects went up – putting more downward pressure on demand.

Things have improved as we start 2023. The Chinese government has begun loosening restrictions and recently unveiled a policy package aimed at revitalizing the real estate sector.

The real test for global demand will be how long and deep the coming recessions are.

But not all iron ore is the same.

Varying grades and qualities have a material impact on emissions during the steel making process. This is one of the reasons Anglo American and Rio Tinto, who generate around 30% and 60% of revenues from iron ore respectively, see their higher quality products benefitting from the decarbonisation of the steel making process.

In fact, Anglo estimate a steel producer can get a 20-25% emission reduction by swapping from low to high quality iron ore.

We tend to agree with BHP’s assessment, who generate just shy of 50% of revenue from iron ore and believe it’s unlikely to be a major growth driver from here out. However, we think it will remain a key commodity over the medium term and opportunities lie with those able to extract higher quality products.

Of course, there are no guarantees and iron ore demand’s are inherently linked to the health of both the Chinese and broader global economy.

Copper

The world can’t live without copper. Its use dates to ancient Egyptian times, where it was used to disinfect wounds, and even further back than that as material to craft weapons from. Modern uses take full advantage of its heat and electrical conductivity, from electric vehicle engines to power storage and household wiring.

You don’t typically need to dig too deep to find copper ore deposits, with most mines being open-pit and close to the surface. Underground mining is less common and more expensive.

Demand for copper is something many see as only going in one direction, up. Glencore, one of the world’s largest miners and a significant contributor to the global supply of copper, expects demand to outstrip supply by around 50 megatons by 2030 based on the current trajectory.

To put that in context, Glencore expects total copper supply to reach around 300 megatons by 2030 - so there’s a significant shortfall based on those projections.

The mining industry at large has been wary of making large multi-billion-dollar investments to bring new sites online. As costs continue to rise, large scale greenfield projects could be even more unlikely. In fact, Glencore estimates industry investment in expanding copper supply in 2025 will be some 61% below the 2012 peak.

For the bigger players, we expect to see more mergers and acquisitions. Rio Tinto’s work to acquire the remaining stake in Canadian mining company Turquoise Hill, for $3.3bn, is a prime example. The deal will boost Rio's stake in what's expected to be one of the biggest copper mines in the world. Rather than starting from scratch, increasing its stake in an existing project is a lower risk option and a good move in our view.

As far as supply’s concerned, the likes of Glencore are waiting for the market to be crying out for more before taking any real action. Glencore’s lined up a potential new project in Argentina, which would mark one of the first greenfield projects the company has taken on in a while. But, it’s very early doors.

Lithium

Lithium, dubbed by some as ‘white gold’, is used in things like phones and computers. But the main use, and why it's seen as a crucial material for the future, is in the batteries that power electric vehicles (EVs).

Your typical lithium-ion battery for an EV contains about 8kg of lithium. That might not seem like a lot. However, when you consider new battery capacity deployed on roads over the first half of last year was up 79%, demand is increasing at a rapid pace.

Supply has simply struggled to keep pace, and we’ve seen prices skyrocket as a result. But such is the lure of the profits that can be made mining white gold, new supply is coming. Some estimates suggest a six-fold increase in total supply by 2030, from levels seen in 2021.

We tend to take estimates like this with a pinch of salt, but an increase in capacity is necessary. Not least because the US and Europe are desperate to increase domestic production to reduce reliance on China.

China produces three-quarters of all lithium-ion batteries and accounts for just under two thirds of the world’s lithium supply.

Rio Tinto sees an opportunity in this market. Last year acquisition of the Rincon lithium project in Argentina was a step in that direction. It’s still early days, but funding’s been approved for early works and a small plant’s currently in operation.

We cover some of the world’s largest miners as part of our ongoing share research coverage, some of which have been mentioned here. If you’d like to receive updates from our analysis, it can be sent straight to your inbox.

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