Seeking Opportunities in Metals of the Future
Metal exporters in emerging markets (EMs) may be underappreciated given the increased demand for clean transportation created by regulation and consumer preferences—and this could bolster the outlook for frontier markets with burgeoning mining investments.
As we explained in a previous blog post, the contribution of emerging and frontier markets to global trade in clean-energy metals has steadily grown in recent years. In 2020, EMs were the source of 44.3% of exports of big-five transition metals, which are those metals heavily needed in renewable energy infrastructure, mainly in electrification activities: copper, nickel, aluminum, cobalt, and lithium. This was up from 42.6% in 2016. The chart below illustrates.
China is an important source and destination of the metals of the future, consuming about half of all major base metals in 2022, according to Standard & Poor’s. The other largest global exporters of these metals include Chile, Russia, and Indonesia.
Notably, the value of transition metal exports by frontier markets grew by 45% over the past five years, with production emerging in new countries such as Namibia, Côte d’Ivoire, and Pakistan. Clean energy metal mining projects are becoming more valuable, which is likely to drive the search for new reserves and mining projects. Over and above the support the hunt for metals provides to prices and terms of trade, it also offers the potential for increased export proceeds and foreign direct investment inflows to key emerging and frontier markets.
But let’s look at the opportunities we see in key regions: Latin America, Sub-Saharan Africa, and Asia.
Latin America: Dominates Global Cooper Supply With Significant Potential in Lithium
The copper mining industry is a critical component of both the Chilean and Peruvian economy, contributing meaningfully to exports (62% to 63% of total) and fiscal revenue (5% to 6% of total). And production is developing in both emerging and frontier markets.
Copper production started in Panama in 2019, and its contribution to fiscal revenues and exports is set to expand further in line with new tax arrangements, growing volumes, and supportive prices. We believe Panama’s annual copper ore exports are likely to grow from $1 billion (11% of goods exports) in 2020 to more than $4 billion in coming years as production ramps up at a new mine, which will be one of the largest in the world.
Critically, as Panama’s copper export volumes increased and copper prices moved higher, the country’s current account shifted from a deficit to a surplus, sharply improving the performance of the external sector and allowing for considerable accumulation of international reserves.
Meanwhile, Bolivia, Argentina, and Chile dominate global lithium reserves, with 56% of identified lithium resources in what the U.S. Geological Survey calls the “lithium triangle.” The contribution of lithium carbonate exports to overall exports is currently small (0.3% and 0.9% of total 2021 exports for Argentina and Chile, respectively). However, it has potential to grow significantly under the right policy mix.
Sub-Saharan Africa: Home to Largest Cobalt Producer With Meaningful Output of Copper
The Democratic Republic of Congo (DRC) is the world’s largest producer of cobalt, providing more than 70% of the world’s production. Other producers, including Russia and the Philippines, account for less than 4.5% of production.
The processing capacity for both copper and cobalt is largely concentrated in Asia, but the DRC and other countries in the region are seeking to adopt policies that will stimulate a regional battery manufacturing industry. This could enable an integrated value chain to emerge across Gabon, Angola, Zambia, the DRC, and Mozambique given the presence of critical inputs in these countries.
Zambia, for example, already has a well-established mining sector that contributes more than 11% to GDP, 28% to government revenues, and almost 80% of export revenues, as the chart below shows.
Manganese is used in lithium-ion battery cathodes. South Africa and Gabon account for about 43% of global manganese ore production. A new project in Gabon is under development, which will increase the mine’s annual capacity from 4 million tons to 7 million tons by 2023. Paramount to these efforts will be an overall improvement in infrastructure and the stability in the political legislative and fiscal regime.
Asia: Indonesia Betting on Moving Up the Electric Vehicle Value Chain
Nine countries globally account for 75% of global nickel reserves. In the emerging world, two of the four countries with the highest nickel reserves are Asian: Indonesia and the Philippines. (The other two are Brazil and Russia.)
Indonesia’s policies toward natural resource development (which have included export bans on ores) have faced criticism given the rapid pace of change in policies over a decade ago. However, Indonesia overall is seen as successful in achieving a well-diversified export base that has moved beyond the exportation of basic commodities to processed goods and increasingly manufactured goods.
The Center for Strategic and International Studies expects Indonesia alone to account for around half of global nickel production growth through 2025, thanks in part to a joint venture with a Chinese firm set to play a key role in the global nickel supply for batteries in the future.
In our next post in this series, we will dive into the environmental, social, and governance (ESG) considerations that are raised by increased demand for the metals of the future.
Metals of the Future Series
Rising Demand Supports Commodity Exporters
Seeking Opportunities in Metals of the Future
Sustainability Critical in Extractive Industries
Yvette Babb is a hard and local currency portfolio manager on William Blair’s emerging markets debt (EMD) team.