Strategy and management consulting firm McKinsey & Company (McKinsey) recently launched its inaugural Global Materials Perspective, highlighting the new phase of the energy transition where costs, complexity, challenges, and tradeoffs are beginning to play out. The intertwined dynamic between the energy transition and materials is creating adaptive challenges for the industry. This is demonstrated by the growing share of global market production increasingly shifting toward energy transition materials, such as copper, lithium, and nickel. The highest level of growth is expected from copper at 30% and lithium at 475% by 2035, the company said.
The Global Materials Perspective – which provides a companion viewpoint to McKinsey’s 2024 Global Energy Perspective, reveals supply of critical metals, including lithium and nickel, is scaling up more quickly than expected. Simultaneously, demand patterns are shifting towards alternative technologies and materials in anticipation of potential supply gaps. All this is closing the expected supply-demand gaps, the analysis shows there are still expected shortages for several critical materials that are used in the large-scale deployment of low carbon technologies including lithium (30-40%), rare earth elements (30-40%), iridium (10-20%), and copper (10-20%).
Michel Foucart, Associate Partner at McKinsey, noted: “The size and shape of the metals and mining value pool are continuously changing as the energy transition progresses. Closing the supply demand-gap for critical commodities will be essential to the economic deployment of low-carbon technologies and accelerating the transition.”
The analysis highlights that overall the sector is in a strong financial position, having seen strong growth in profitability over the past years. Maintaining a strong financial position will be required to scale up the metals and mining industry to support the energy transition, with analysis based on insights from McKinsey’s Metal&MineSpans estimating as much as $5.4 trillion in global capex and 270 GW of power needed (with another 1,100 GW required to decarbonize) to meet demand by 2035. While this could generate 340,000 global jobs to scale supply, 1.25 million jobs may be at risk, driven by the associated decrease in thermal coal demand.
The pace of decarbonization in the industry is unfolding slower than required to support the goals of the Paris Agreement and the cost of deep decarbonization remains high, with an increase of more than 30% in operational costs for some materials, especially for brown-to-green transitions. This is particularly challenging as underscored by the analysis of McKinsey’s recent survey of leading industry players across steel, aluminum, and copper, which demonstrated only 15% of customers surveyed indicated a willingness to pay for premiums of approximately 10% for green materials by 2030.
“According to our analysis, there is currently sufficient financing capacity in the industry to scale up production, with $5.9 trillion in financing capacity available,” said Michel Van Hoey, Senior Partner at McKinsey. “However, the business case is not always attractive enough to incentivize investment. Based on the current pipeline, for example, our research indicates that copper prices would have to increase to approximately $12,000 per ton (+20%), lithium to $19,000 per ton (+30%), and nickel to $21,000 per ton (+5%) to incentivize more supply to come online.”
The report sheds light on the challenges ahead for the materials industry in balancing continued supply-demand dynamics and its own decarbonization pressures. Despite those challenges, the industry has an opportunity to bridge the gap and is well-positioned to play a pivotal role in supporting the energy transition.
