02 May 2023
In this article, we examine four megatrends shaping the mining industry’s future along with considerations for business leaders to maximise opportunities and navigate the uncertainty and risk that comes with changing market conditions.
1. Increase of disruption and uncertainty
Disruption has become a constant in today’s world, as evidenced by the global pandemic, protracted European conflict and the ensuing political turmoil and energy market turbulence.
For mining businesses looking at a transaction or exit activity, the picture has become far more complex in today’s capital markets. Since the war in Ukraine, the funding and Intellectual Property Office (IPO) markets have been heavily impacted and deal activity has slumped. This has impacted all sectors, including mining. Debt funding has been getting more expensive due to higher interest rates, making it harder to secure and service.
Political risk and disruption also have an immediate effect on the global markets.
2. The urgent need to transition to renewable energy
As the world transitions to sources of renewable energy over the next decade, we will rely on mined metal and rare earth components.
Nickel, graphite, cobalt and lithium are essential for the fast-growing battery market as integral components in the different stages of battery production, including extraction and mining, chemical processing, cathode and anode production and lithium-ion battery cell manufacturing. For offshore wind energy transmission, copper is required for cabling, for example, 50kg of copper is needed per metre of submarine cable.
Demand will be heightened for mined materials as we move towards decarbonisation in developed economies via solar, onshore/offshore wind and battery storage. Bloomberg has predicted new copper supply to peak in 2024/2025, however this projection is sensitive to grade depletion and political disruption on mine production over the next decade.
Set against this backdrop, we recognise the significant role the mining industry plays in supporting the transition to a low-carbon economy. Obtaining rare earth metals will be a matter of national competitiveness, which means a key issue for the industry will be the siting of and access to rare earth factories.
3. Inflation has peaked, interest rates may have further to go
Inflation has likely peaked in most developed countries and will fall sharply this year as pandemic-related supply chain disruptions normalise and the huge drop in wholesale energy prices feeds through to firms’ costs and households bills. This means that while interest rates have not quite reached their peak, they are not far off. The risk is that labour markets across the developed world remain tight, forcing central banks to push interest rates higher.
The rise in inflation across developed economies, combined with higher interest rates, mean there is still a risk of a recession in many economies this year. Even if economies manage to avoid a recession, growth is likely to be slow over the next year. We don’t expect the economy in the UK to be any bigger in 2024 than it was in 2019.
Recessions and/or flat growth across the developed world and higher interest rates will bring down global inflation. But the challenges of ageing workforces and a move to more secure global supply chains means that labour markets will remain tight, global inflation will remain higher than over the previous 10 years and interest rates will not return to recent levels of near zero.
We expect a return to the old normal of higher inflation and higher interest rates. The rapid recent increases in long-term bond yields indicate a higher cost of capital that will affect the willingness of businesses and financial institutions to borrow or lend. Along with the sell-off in the equity markets, the tightening of financial conditions is part of an intentional programme to limit spending and reduce inflation.
We think this marks a break from the era of disinflation and extremely low interest rates. The Federal Reserve is likely to consider a new range of inflation above its 2% target as increases in the costs of energy, food and housing, as well as long-term investment, may prove to be too stubborn.
There are advantages to consider if interest rates stay above 4%. Higher interest rates offer a significant slice of the population a safe place to park their nest eggs. They also imply normal levels of return on investment within the real economy.
In the end, the changes are prompting a regime shift that was hard to imagine two years ago.
4. The increasing focus on ESG
“Despite the current economic turbulence, ESG remains of paramount importance.”
Rich Hall, head of sustainability and ESG specialist
The focus on ESG (environment, social and governance) will only increase following announcements at COP27), where it was finally recognised that the opportunity to limit global warming to 1.5 degrees Celsius above pre-industrial levels, has all but vanished. The hopes of remaining within 1.5 degrees now rest on a technology breakthrough of such significance, scale and timeline that many are reluctantly aiming for a 2.0-degree scenario.
Outside of climate change and wider environmental concerns including waste, pollution, and loss of biodiversity, there are guiding principles for modern slavery, equality, diversity and inclusion (EDI) and social justice. There is an increasing movement of businesses with greater social purpose that are influencing finance and supply chains. Safety, always a focus for investors and wider stakeholders, will be at the forefront of ESG assessment and performance following the recent mining disaster in Turkey.
We are seeing greater investment in specialist recycling plants and strategic investments in factories with tied mines and reserves akin to vertical integration, both aimed at security of supply as well as outright capacity.
For more traditional supply chains, disruption may lead to an increasing use of more informal controls, with business-to-business relationships being key to overcoming disruption. The application of force majeure clauses within contracts for those without the necessary supply chain prerogatives cannot be ignored, given the increasing competition for finite resources.
For mining, the ESG picture is complex, as it is seen as both part of the solution and the problem. The focus for its supply chains must be on lowering their carbon intensity, reducing their wider environmental footprints, and remediating to the highest standards, all whilst upholding workers’ rights and safety.
Dealing with uncertainty and risk comes with the territory for businesses operating in the mining sector, which, by virtue of its globally interconnected nature, is sensitive to fluctuating market conditions.
So, what are the key considerations for business leaders to maximise opportunities and reduce the impact of these challenges?
1. The importance of compliance and planning
As they typically have an international footprint, mining companies can benefit from:
- identifying and leveraging the most efficient corporate tax structure for a global resource group;
- operating good financial controls when dealing with remote operational locations; and
- staying abreast of changing regulations impacting the sector and countries of operation – the role of a professional adviser with a strong international and sector understanding is key.
2. The importance of applying ESG principles to supply chains
Going forward, the following guiding principles will be of increasing importance:
- modern slavery;
- equality, diversity and inclusion (EDI);
- social justice;
- safety; and
- workers’ rights.
3. Start planning early for funding
It’s never been more important to start early when considering future funding requirements and being investor-ready for when market conditions become more favourable.
Going forward, any new mining investments must be both profitable and compatible with the green economy.
This article has been a collaboration from the following RSM experts:
Please contact Paul Watts if you would like to discuss how these issues may impact your business.