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MiamBair
EMERGINGMARKETSDEBT
InvestmentManagement
MetalsoftheFuture2.0:HowtheEnergy
TransitionIsTransformingtheMetalsMarkets
Inthetwoyearssincewepublishedourresearchonelectricvehicles
(EVs)andmetals,we’veseenadynamicmetalsmarketunfoldbefore
oureyes.Thecopper,lithium,andnickelmarketsareundergoinga
rapidtransformation,drivenbythegreenenergyrevolution,whichhasspurredinvestmentsandinnovationtomeetthegrowingdemandof
EVsandrenewableenergy.Inthispaper,weexplorehowsupplyand
demandforsomeofthese“commoditiesofthefuture”havebeenshapedbythetransitiontoalow-carbonfuture.Wealsoexploregovernmentalresponsesfromemergingmarkets(EMs)totheseshiftingdynamics.
December2023
CorporateCreditAnalyst
AlexandraSymeonidi,CFA
DemandDynamics
Theenergytransitionfromtraditionalfossilfuelsto
renewableresources,aswellastheelectrificationofseveralglobaleconomicsectors,isnowevidentinthedemandforcopper,lithium,andnickel.Investmentsinelectricgrids
worldwidehaveacceleratedinthelastcoupleofyearsasaresultofinvestmentsinrenewablepowersystemsandtheinfrastructureneededtosupporttheelectrification
oftransportationandothersectors.
Copper
AccordingtotheInternationalEnergyAgency(IEA),
globalinvestmentinelectricitygridsincreasedaround
8%in2022.Chinahasledthisgrowth,withinvestmentsingridandinfrastructureup28%year-over-yearfrom
JanuarytoOctober2023.Chinesedemandforcopper
nowconstitutes60%oftheworldtotal.Whiledemandforallcopperusesishigherthanhistoricalrecords,demandforwire,whichhasmultipleusesinthegridandEV
infrastructure,hassignificantlyoutperformeddemandforothercopperusesinChina.
InEurope,EVsalescontinuetoadvance,withEV
registrationsrecordingawhoppingcompoundannualgrowthrate(CAGR)of55%from2017to2022.Gridandinfrastructureinvestments,coupledwithEVadoption,constitutethelargestconsumersofcopperworldwide,strengtheningcopperdemandresilienceinthefaceofcurrenteconomicchallenges.
EXHIBIT1
ChinaElectricityInvestments,GridandInfrastructure(inBillionCNY)
1,400
1,200
1,000
800
600
400
200
0
201720182019202020212022First10Months,First10Months,
20222023
Sources:BloombergandWilliamBlair,asofOctober31,2023.
2|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET
DemandDynamics(continued)
EXHIBIT2
ChinaCopperDemand(Uses)
180
170
160
150
140
130
120
110
100
90
802/213/214/215/216/217/218/219/2110/2111/2112/211/222/223/224/225/226/227/228/229/2210/2211/2212/221/232/233/234/235/236/237/238/239/2310/2311/23
Tube(Construction)
Wire(Grid)Rod(Grid/ElectricApplications)PlateandSheet(Industrial/ConsumerDurables)
Sources:BloombergandWilliamBlair,asofAugust31,2023.Indexedto100inDecember2020.
EXHIBIT3
EVRegistrationinEurope
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
CAGR55%
201720182019202020212022
Sources:InternationalEnergyAgency(IEA)andWilliamBlair,asof2022.
WILLIAMBLAIRINVESTMENTMANAGEMENT|3
DemandDynamics(continued)
4|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET
Lithium
Amongallcommoditiesofthefuture,lithiumhasprobablyundergonethegreatesttransformation.Theelectrificationoftransportationhasdrivenacolossalshiftinthedemandcompositionforlithium,whichhadaCAGRof23%from
2017to2022.EVbatteriesarethebiggestcontributortothisdynamic,nowrepresentingmorethan50%oftotaldemandforlithium(upfromabout30%in2017).Otherusesoflithiumincludeconsumerelectronics(which
uselithium-ionbatteries),glassmaking,ceramics,andpharmaceuticals.
EXHIBIT4
Lithium’sShareofCleanEnergyDemand
2022
56%30%
2017
OtherDemandCleanEnergyDemand
Sources:InternationalEnergyAgency(IEA),GlobalData,andWilliamBlair,asof2022.
“Amongallcommoditiesofthefuture,lithiumhasprobablyundergonethe
greatesttransformation.”
AlexandraSymeonidi,CFA
DemandDynamics(continued)
WILLIAMBLAIRINVESTMENTMANAGEMENT|5
Nickel
Nickeldemandhasbeenacceleratinginthelastthree
years.Itgrew11%in2022andisexpectedtogrowanother14%in2023.Forcontext,demandgrowthformost
industrialmetalsiscomparabletoglobalannualgross
domesticproduct(GDP)growth,whichhasbeenmuch
lowerthanthedouble-digitgrowthexperiencedinnickel.ThisgrowthisaresultofnickelbeingusedasacomponentofEVbatteries.Thecompositionofnickeldemandhas
beenchangingtoo.Cleanenergynowconstitutes16%oftotaldemand,upfromjust6%in2017.
EXHIBIT5
Nickel’sShareofCleanEnergyDemand
2022
16%
6%
2017
OtherDemandCleanEnergyDemand
Sources:InternationalEnergyAgency(IEA),GlobalData,andWilliamBlair,asof2022.
EXHIBIT6
GlobalNickelDemand(InThousandTonnes)
4000
CAGR10.2%
3500
3000
2500
2000
1500
20192020202120222023E
Sources:StatistaandWilliamBlair,asof2022(2023isestimated).
6|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET
SupplyDynamics
Thesupplyresponsetotheverypronounceddemand
shiftsobservedinthesemetalshasbeenremarkable.
Automakers,equipmentmanufacturers,andbatterycellmakersallwanttogetinvolvedinthevaluechainofthesecriticalmetals.Asweillustratedinourpreviouspaper,
demandforthesemetalsisexpectedtoaccelerateevenfurther,raisingquestionsaboutscarcityandtheabilityofsupplytomeetdemand.
Copper
Whilecopperminersrecognizecopper’simportance
forgreentechnologies,productionischallenging.
Copperminershavefacedincreasedregulatoryscrutiny,agingassets,declininggrades(theconcentrationof
copperintheorebeingmined),andchangingweather
patterns,includingpronounceddroughtsinChileand
floodinginZambia.Globalcoppersupplyhasgrownonlyinthelow-single-digitlevelsoverthepastthreeyears,
withnewprojectsinPeruandtheDemocraticRepublicofCongomostlyoffsettinglowerproductioninthe
world’slargestcopperproducingcountry,Chile.This
hasresultedinmarketdeficitsoverthepastthreeyears.In2023,asurplusisexpectedduetolacklusterdemandfromdevelopedmarkets.
Despitethesedynamics,copperminersareramping
upinvestmentstofulfilthehighanticipateddemand.
Capitalexpendituresinthe10largestminers,which
representabout44%ofglobalproduction,increased13%in2022andareexpectedtogrowanother14%in2023.
EXHIBIT7
CopperMarketBalanceandInvestments
-12%18%13%14%
200,000
100,000
0i
-100,000
-200,000
-300,000·2020202120222023E·
MarketBalanceinTonnesAnnualGrowthofCapitalExpenditures,Top10
CopperMiners
Sources:InternationalWroughtCopperCouncil,Nornickel,Bloomberg,andWilliamBlair,asof2022(2023isestimated).
“Copperminershavefacedincreased
regulatoryscrutiny,agingassets,
declininggradesandchangingweatherpatterns,includingpronounced
droughtsinChileandfloodinginZambia.”
AlexandraSymeonidi,CFA
WILLIAMBLAIRINVESTMENTMANAGEMENT|7
SupplyDynamics(continued)
Lithium
Thesupplyoflithiumishighlyconcentratedinafew
locationsandcompanies.Thetwolargestlithium
operationsintheworldaccountedfor43%oftotallithiumproductionin2022.Still,lithiumsupplyhasincreasedto
meetthegrowinguseofrechargeablelithium-ionbatteries,whicharewidelyusedinconsumerelectronics,EVs,and
energystoragesystems.Abriefdeclineoflithiumcarbonatepriceswasobservedin2020asaresultofsupply-demand
dynamics,butpricespeakedin2022.Thusfarin2023,
lithiumproductionhassurpassedconsumption,resultinginanabruptpricecorrectionfromall-timehighs.LowerEVsales,inventorybuild-upintheenergystoragesector,demanduncertaintyinChina,andnewsupplycoming
onlinefasterthananticipatedarekeyreasons.
Anaccelerationindemandgrowthisanticipatedfor
lithium,promptingproducerstoexpandtheirinvestmentsinthesector.Capitalexpendituresinthefivelargestlithiumproducersworldwide,whichaccountfor65%oftotal
production,grew53%in2022andareexpectedtopickupanother66%thisyear.
EXHIBIT8
CapexGrowthintheTopFiveLithiumProducers
132%
75%
66%
53%41%
19%
19%
-30%
20162017201820192020202120222023E
Sources:BloombergandWilliamBlair,asof2022(2023isestimated).
EXHIBIT9
LithiumDemand,Supply,andMarketBalances(ThousandTonnes)
140
120
100
80
60
40
20
0
2016201720182019202020212022
Demand(LeftAxis)Supply(LeftAxis)MarketBalance(RightAxis)
Sources:InternationalEnergyAgency(IEA)andWilliamBlair,asof2022.
20
15
10
5
0
-5
SupplyDynamics(continued)
8|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET
Nickel
Alongsidelithium,nickelhasprobablyseenthelargestexpansioninproductionvolumescomparedtoother
metals.Since2019,Indonesia,whichaccountsfor50%ofglobalnickeloreproduction,hasrapidlydevelopeddomesticprocessingfacilitiesinanattempttocapturemorevaluefromthemetalandtobecomeaglobalEVsupply-chainhub.Accordingtogovernmentestimates,thevalueofprocessednickelproductsin2022was
$30billion,10timeshigherthanitwasfouryearsago.Indonesiaincreasedthenumberofoperatingsmeltersfrom15in2021to43thisyear;another28smeltersareunderconstructionand24areintheplanningstages.
It’sworthhighlightingChina’scontributiontothis
expansion.Thecountryhasmadeinvestmentsofaround
$30billion,andtwoofthelargestnickelindustrialhubs
(theMorowaliIndustrialParkandtheWedaBayIndustrialPark)areoperatedbythesameChinesecompany.This
investmentstandsoutasoneofthelargestunderChina’sBeltandRoadInitiative(BRI).
ThisvastincreaseinsmeltingcapacityledIndonesia
tobecomeanetimporterofnickeloreforthefirsttime
initshistoryin2023.However,themostsignificant
consequenceofthisexpansionisthattotalprimarynickelproductionhassurgedtopeaklevelsleadingtomarket
imbalances.TheInternationalNickelStudyGroupexpectsthisyear’ssurplustobethelargestinthelastdecade.
EXHIBIT10
NickelMarketBalanceandPrice
300
200
100
0
-100
-200
201220132014201520162017201820192020202120222023E
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
BalanceinThousandTonnes(LeftAxis)PriceinDollarsperTonne(RightAxis)
Sources:InternationalNickelStudyGroup,Bloomberg,andWilliamBlair,asof2022.Balance(leftaxis)isinthousandtonnes.Price(rightaxis)isindollarspertonnes,year-to-date.
WILLIAMBLAIRINVESTMENTMANAGEMENT|9
EMResourceNationalism
Countriesinwhichminingforthemetalsofthefuture
hasmadeupasignificantpartofGDPhavetakenanactivestancetowardthedevelopmentandcommercializationoftheseresources.SeveralEMgovernmentsrecognizethe
valueofthesemetalstofuturetechnologiesandaimto
capturealargershareofagrowingpie.Belowwehighlightsuchcases.
Copper
Chile,thetopproducerofcopper,finalizedanamendmenttoitsminingtaxregimein2023.Theregime,nowroyalty-based,willincreasetaxesfrom5%to14%ofoperating
profitsto8%to26%ofoperatingprofitsforlargeproducers.Thenewroyaltywillalsohaveanad-valoremcomponentof1%.Whilethecalculationoftaxableincomehaschanged,
thenewroyaltyregimepromisestoincreasestaterevenuesfromthesector,especiallyinahigh-priceenvironment.
In2019Zambiareviseditsroyaltyratesfrom4%to6%
ofoperatingprofitsto5.5%to10%ofoperatingprofits,
dependingonprices.Copperexportsaccountforasmuchas12%ofZambia’sGDP,makingtheresourcecrucialtoitseconomicdevelopment.
InPanama,theminingconcessioncontractforthecountry’slargestcopperminerecentlysparkedunprecedented
protestsduetoitsimpactontheenvironmentandthe
distributionofprofitsbetweenthemineoperatorandthestate.InlateNovember,Panama’ssupremecourtruled
thecontractunconstitutional,whilethemine,which
contributes3%to5%tothecountry’sGDP,halted
operationsduetoblockades.Earlierinthesamemonth,Panama’sCongressbannednewminingconcessions
andextensionsofcurrentconcessions.Certainly,thisexemplifiesacaseofresourcenationalism,inwhichacountryassertscontroloveritsnaturalresources.
Lithium
China’spushtobecometheworld’stopsupplierof
solarcells,lithium-ionbatteries,andEVs,isdrivingtheneedforthecountrytosecurealargeshareof
thelithiumsupplychain.Indeed,ChinahasinvestedbillionstoacquirestakesinlithiumminesinLatin
AmericaandmostrecentlyAfrica.Accordingto
BenchmarkMinerals,two-thirdsofforecastlithiumproductionwillbeownedbyChinain2030.
“AccordingtoBenchmarkMinerals,twothirdsofforecastedlithiumproductionwillbeownedbyChinain2030.”
AlexandraSymeonidi,CFA
Chile,whichishometotheworld’slargestlithiumreserves,announcedearlierthisyearastrategytonationalizeits
lithiumindustry.Thestrategywouldallowthestatetoleadlithiumminingandprocessingprojectsthroughnational
companies,therebyensuringalargerrevenueshareto
thestateandbetterenvironmentalconditions.Underthe
currentregime,independentlithiumproducersareleasingmineralconcessionsfromagovernmentalorganization
calledCorporacióndeFomentodelaProducción(CORFO).Theseleasescontributedmorethan$5billiondollarstotheChileantreasuryin2022,about2%ofthecountry’sGDP.
ButChileisnotthefirstcountrytonationalizeitslithiumresources.Earlierin2022,Mexicodeclaredlithium
asastrategicmineral,meaningthattheexploration,
exploitation,andend-useoflithiumwillbeanexclusive
rightofthestate.ThecountryhassetupanationallithiumcompanythatwillseektoestablishMexicoasaprominentlithiumminingnation.
Nickel
PerhapsanotherexampleofresourcenationalismhasbeenthebanonexportsofnickeloresfromIndonesia.Initiallyimplementedin2014andreinforcedin2020,theban
soughttodevelopdomesticnickelandEVsupplychains.Partofthestrategytodevelopthedomesticmarketistaxincentivestonickelprocessingfacilities.Thegovernmenthasrecentlyrevokedthe10-yeartaxholidayforlow-gradeproducerstoencouragemoreinvestmentindownstreamprocessesandbattery-gradenickelmanufacturing.
10|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET
InvestmentImplications
Webelievethelikelihoodofenduringdemandformetalsofthefutureduetotheenergytransitionbodeswellfor
marketprices.Forthecorporatecreditinvestor,this
shouldtranslateintorobustcreditfundamentals,suchasmarginsandcashflows.
Moreover,manymetalcompaniesintheEMdebtuniversehavereducedleverage,whichcouldhelpthemwithstand
metalpricevolatility.
Maturitiesareaddressedwellinadvance,whilewehavenoticedaninvestorpreferencefordebtissuedby“futuremetals”companiesincontrasttoothermetalsproducers.
Aswehavehighlighted,companiesrichinfuturemetalscouldincreasinglybenefitfromtheproductionandsaleoftheseminerals.
Forthecountriesmentionedabove,themetalssector
shouldcontinuetobeastrongdriverofGDPandattractforeigndirectinvestment(FDI).
Webelievetheexportvalueandtaxrevenuefromthese
metalscouldincreaseduetohigherproductionanda
resilientpriceoutlook,andovertimethisshouldleadtoanimprovementinsovereigncreditfundamentals,which
isappealingtothesovereigninvestor.
“Webelievetheexportvalueandtax
revenuefromthesemetalscould
increaseduetohigherproductionandaresilientpriceoutlook,andovertimethisshouldleadtoanimprovementinsovereigncreditfundamentals,whichisappealingtothesovereigninvestor.”
AlexandraSymeonidi,CFA
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