Future minerals: from underground to building blocks of tomorrow

You may have heard of so-called future minerals. They’re the mined commodities – some exotic, others more prosaic – on which many sustainability technologies rely.

We’ve been doing a lot of research into these critical building blocks of the future – how they’re important to the energy transition, the constraints on supply, and why all this matters to investors.

We asked abrdn’s Iain Pyle, senior investment director, some key questions on this theme:

What are future minerals and why are they important?  

Future minerals are mined commodities that are essential to the future development of economies. They broadly align with commodities that are essential to the energy transition as we move away from fossil fuels towards electrification. We expect demand for a lot of these commodities to rise significantly in the years to come.

Can you give a couple of examples?

Future minerals include copper, lithium, aluminium, platinum and nickel. For example, copper is a metal which is very widely used because of its qualities as a good conductor – it's essential for most electronic and electrical applications out there. But future demand will also be driven by its use in electricity grids and electrification, as well as its significant use in electric vehicles (EVs).

Meanwhile, lithium is important because of the lithium-ion rechargeable batteries that power EVs. It’s estimated that by 2040, we’ll need 42 times more lithium than what was needed in 2020.

In recent years there’s been talk about another commodities ‘super cycle’. Do you think we’re at the start of one and why?

A ‘super cycle’ is a period when demand for something increases significantly, and for a long time, due to structural change. This leads to sustained price increases. We think we may be at the start of a new super cycle for future minerals.

Demand is driven by necessity and by government policy. The need to move away from fossil fuels and into electrification is clear, and this move is well supported by new regulations. It’s likely that demand will remain robust throughout multiple economic cycles over at least the next 20 years or so.

On the other hand, supply will also be constrained. Mining companies haven’t invested in developing new resources over the past decade. That means there hasn't been much more production capacity coming online. Where you do have capacity, you're seeing production volumes and quality decline.

What should investors look for to make the most of these developments?

The opportunities are diverse and located at all points of the value chain – the range of activities needed to create a product or service. Investors should invest in the companies associated with each future mineral (rather than the minerals themselves). History shows us this is a better way to take advantage of higher commodities prices.

In addition to the mining companies themselves, look up the value chain to those firms supplying the equipment needed to extract minerals out of the ground. Also, look down the value chain to those products – such as EVs – that are manufactured using one or more of these future minerals.

Additional areas of interest may include anything that’s assisting decarbonisation in transport, buildings and industry; battery-makers; and permanent magnet motor manufacturing.

Why should someone consider investing now?

It is an exciting time for this sector, and everything is aligning for the start of a super cycle that could end up being a multi-decade opportunity.

Where you want to get in is at that point where you're going slowly and then it inflects up and starts to rise rapidly.

If you look at China, we've very quickly gone from around 2% of car sales being EVs back in 2020, to around 40% last year. Adoption is occurring very quickly there.

In developed markets, EV penetration is less deep but will accelerate as restrictions on the sale of internal combustion engine cars begin, and as EVs become less expensive.

For example, the UK’s National Grid has published its capital investment plans for the next decade and it’s clear that investment in infrastructure to support the green transition is a key priority.

There’s all this demand and, as we’ve already mentioned, supply will struggle to keep up for some time. This will likely support prices.

Why should investors take an active, rather than passive, approach?

An active approach allows you to focus on what matters. It allows you to hold higher quality companies which should do better over the long term. It allows you to be flexible through what will be a structural change.

But we will see short-term commodity cycles through that period. Active management allows investors to seek value when many others are piling into the most popular investments.

An active approach also allows investors to manage environmental, social and governance (ESG) risks better – an important consideration when dealing with mining companies that are often operating in emerging markets.

Iain Pyle is a senior investment director, UK equities, at abrdn.

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