Dynamic between energy transition and materials 'challenges industry'

McKinsey launches inaugural Global Materials Perspective, highlighting the new phase of the energy transition where 'costs, complexity, challenges and trade-offs are beginning to play out'.

The report highlights how 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 Global Materials Perspective – accompanied by McKinsey’s 2024 Global Energy Perspective – reveals that 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, although 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, comments, '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 estimating as much as US$5.4trln in global capex and 270GW of power needed (with another 1,100GW 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 decarbonisation in the industry is unfolding slower than required to support the goals of the Paris Agreement and the cost of deep decarbonisation remains high, finds the report, 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 McKinsey’s recent survey of leading industry players across steel, aluminum and copper, which demonstrates 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 US$5.9trln in financing capacity available,' says Michel Van Hoey, Senior Partner at McKinsey. 'However, the business case is not always attractive enough to incentivise investment. Based on the current pipeline, for example, our research indicates that copper prices would have to increase to approximately US$12,000/t (+20%), lithium to US$19,000/t (+30%), and nickel to US$21,000/t (+5%) to incentivise 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 decarbonisation 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.