Last year, STOXX introduced the STOXX® Global Copper Miners and STOXX® Global Lithium and Battery Producers indices. The indices, developed by STOXX in partnership with BlackRock’s iShares, target companies with the highest revenues from, and largest market share in, mining the two metals. The latter also includes companies involved in lithium compounds manufacturing and battery assembly.
We sat down with Omar Moufti, Thematics and Sectors Product Specialist for iShares EMEA, to ask him what’s driving demand for essential metals, and how iShares ETFs achieve exposure to this long-term theme.
Omar, what is the investment proposition with metals?
“From a broad and macroeconomic perspective, one of the key reasons we see investors seeking to allocate to metals is for exposure to real assets in an inflationary environment. The market events over the last few years have put the broad portfolio approach into context, and have pushed investors to refocus attention on diversification and portfolio resilience to various outcomes. This has brought commodity-linked equities to the fore.
But another reason, more specific to the exposures themselves, is to express bullish longer-term views on metals and the companies that produce them. The mining segment has seen multiple years of underinvestment. In 2022, for instance, exploration budgets remained over 35% below the 2012 peak, despite metals pricing surpassing the peaks from those years.[1]
It would seem that the prior cycle of overinvestment and low metals prices that followed, as well as current global macro uncertainty, are keeping miners cautious of investing. So if the forecasted demand for metal increases, the limited potential for supply to follow suit paints a constructive backdrop for metal prices, and thus miners.”[2]
And more specifically, what’s going on with essential metals such as copper and lithium?
“Besides the broader industry backdrop, there are particular and important drivers for so-called essential metals, drivers linked to the transition to a low-carbon economy: moving from a world centered on the combustion of carbon-emitting energy sources to a world characterized by deep electrification. Both copper and lithium are at the center of the structural demand shift we are seeing on three fronts: renewable energies, transportation and their related infrastructure.
The renewable energy space is generating historic tailwinds for copper and lithium. These metals are used in solar panels, wind turbines and for the electrical grid expansion required to accommodate more renewables, as well as the batteries required to store the electricity.
The uptake in electric vehicles (EV) is another key part of the story. An EV requires 2.5 times more copper than a traditional car.[3] And each EV charger adds another 0.7 kg. of copper — up to 8 kgs. for fast chargers.[4] Similarly, lithium is a key component in electric batteries. The International Energy Agency (IEA) expects lithium demand to grow more than eight-fold between 2022 and 2040 in a net-zero scenario, the fastest increase among the primary transition-related metals.[5]
There is no guarantee that any forecasts made will come to pass.
All-in-all, we have a strong structural demand growth dynamic as the transition to a low-carbon economy will be metals and materials intensive.”
So, demand for essential metals is surging at a time of underinvestment in the industry?
“Correct. There are important constraints that have led, or could lead, to a large supply-demand gap. Besides the underinvestment in recent years, there are other factors such as long lead times for new lithium processing facilities, and limited copper deposits discoveries in recent years. These add further headwinds to potential supply.
Finally, the production of these metals is often concentrated in a handful of countries,[6] putting significant global supply at risk in the event of local disruptions. Some analysts expect supply shortfalls in copper and lithium in the next decade, which could push prices higher.[7]
This supply-demand imbalance and the key role the metals play in the future of our economy have driven some governments — such as the US, for instance — to place these metals on critical minerals lists, illustrating their strategic importance.”[8]
Can you tell us a bit about the lithium and copper indices?
“The indices target companies generating significant revenues directly from the copper or lithium markets, respectively, and the companies that play a significant role in these industries. The strategies are focused on the targeted segment, as opposed to a broader metals and mining industry exposure. Still, they remain diversified: over 30 companies in the case of copper, or 60 companies in the case of lithium and batteries.”
What is the difference between investing in the actual metals producers as opposed to buying the commodities?
“In some cases, financial investors can buy commodity derivatives, but managing such contracts can be operationally complex and returns can be eroded by the shape and shifts of commodity futures curves. On the other hand, buying miners’ stocks allows investors to indirectly benefit from the high or rising profitability of these companies derived from elevated or rising metal prices, and potentially from the companies’ improving efficiencies.”
[1] Source: S&P Global Commodity Insights cited in Reuters, “Squeezed mining companies face growth dilemma,” January 31, 2023. See also McKinsey, “Navigating a decade of challenges: Five winning initiatives for mining CEOs,” July 1, 2022.
[2] S&P Global, “World copper deficit could hit record; demand seen doubling by 2035: S&P Global,” July 22, 2022.
[3] IEA, “The Role of Critical Minerals in Clean Energy Transitions,” May 2021.
[4] International Copper Alliance.
[5] IEA Critical Minerals Demand Dataset, July 2023.
[6] World Economic Forum, “This chart shows which countries produce the most Lithium,” January 5, 2023.
[7] Reuters, “Energy transition faces metals gap unless investment rises, report finds,” July 20, 2023.
[8] US Department of Energy, “What Are Critical Materials and Critical Minerals?” February 24, 2022.
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