Mining has a reputation as a cyclical sector, expanding when economic growth is buoyant and slipping as economies contract. However, today, the dynamics of the mining sector are more complex and nuanced, with the energy transition, shifting geopolitics and even the AI revolution changing the demand patterns for mined commodities.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Historically, commodity prices have moved with economic growth. Buoyant growth tends to lead to more investment in new buildings, machinery or products, all of which creates demand for materials, such as lithium, or copper. Mining companies would often lean into that demand, creating new supply1. However, too often, demand would then reverse as economies weakened, leaving mining companies with an excess. This created boom and bust cycles.
Today, the picture is different. The transition away from fossil fuels to low carbon energy sources is creating new sources of demand. This transition is supported by vast government investment, including the Inflation Reduction Act in the US, the Biden administration’s flagship climate legislation, which directed $369 billion in clean energy tax credits and funding for climate and energy programs.2 In Europe, the RePower EU Plan also allocates significant funding for clean energy infrastructure3.
There are new, structural sources of demand, which are not solely dependent on economic growth. This transition requires a huge range of mined commodities. It is only through mining companies that there will be the copper needed for electrification, the metals needed to update electricity grids across the world the lithium for use in batteries, plus the iron ore for the production of steel needed for wind turbines.
A recent report from the Energy Transitions Commission found that annual demand for lithium, which is necessary for batteries and EVs, could increase by up to seven times by 2030. Copper demand is estimated to increase by around 50%. It also points out that it takes many years to bring new supply on stream – up to 20 years for a new copper mine. This will bring steady, less-cyclical demand for certain critical commodities4.
Geopolitical tensions are also shaping demand for commodities. There are multiple geopolitical pressure points across the world, which is pushing countries to achieve energy security and independence5. This is also helping to galvanise the energy transition, and pushing countries to spend more on energy infrastructure, with a knock-on effect for commodities.
Raw materials are needed to shape the future
Technological advances also require mined commodities to facilitate them. AI supremacy requires computing power, which is creating a proliferation of data centres. These require raw materials, from copper, silicon and lithium for the servers, to the aluminium and steel of the actual buildings that house them6. In a recent Turner and Townsend report, 95% of respondents said material shortages had caused delays to data centre construction over the past 12 months2. As countries battle to achieve technological supremacy and harness data effectively, we are likely to see increasing competition for the resources that make this possible.
These changing demand dynamics come against a backdrop of constrained supply. While there are exceptions, most mining companies have not increased capital expenditure to the same level as in previous cycles. Attempts to expand the supply of copper, for example, have been largely unsuccessful, while iron ore supply remains tightly controlled. Companies have been disciplined in their capex.
In the BlackRock World Mining Trust, we are investing in companies producing those commodities with a favourable backdrop that transcends cyclical considerations. These are commodities where governments and companies are not just spending because the economy is expanding, but because changes are necessary for environmental protection, or to remain competitive in a changing world. This means mining is not as dependent on economic growth as it has been in the past.
Source
1 Economist - Why the world’s mining companies are so stingy - Feb 2024
2 Grist - One year in, the Inflation Reduction Act is working - July 2023
3 European Commission - Repower EU two years on - May 2024
4 Energy Transitions Commission - ETC Materials Report - June 2023
5 International Energy Agency - Renewable power’s growth is being turbocharged as countries seek to strengthen energy security - December 2022
6 RICS - Are data centres too demanding on raw materials? - July 2023
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust-specific risks
BlackRock World Mining Trust plc
Counterparty Risk, Currency Risk, Emerging Markets, Gearing Risk, Gold / Mining Funds
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets
Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Gold / Mining Funds
Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.
