Top-of-cycle conditions could prove enduring for metals needed in the global energy transition.

We are now approaching, in our view, top-of-cycle conditions for the metals and mining sector, with metal and steel prices rising to unprecedented levels as strong restocking demand tied to the ongoing global economic recovery and constrained metal supply from COVID-related restrictions affect the pace of resumption of mining activities across several resources-rich jurisdictions.

Such top-of-cycle conditions will likely translate into exceptionally strong earnings and credit metrics for the sector, which in turn could help previously fallen angels like ArcelorMittal and Freeport-McMoRan regain investment grade status on the back of meaningfully improved financial headroom.

That said, we do not believe that this bonanza will last for all metal commodities. We expect a diverging trend will take place: Steel raw material inputs such as iron ore and metallurgical coal could start correcting to more normalized price levels as soon as the current restocking is exhausted, exceptional fiscal and monetary stimuli fade, and steel demand cyclically declines, exacerbating structural overcapacity issues in mature economies. In contrast, battery metals like copper, nickel, cobalt and lithium may continue to experience top-of-cycle conditions, with prices likely to remain elevated for years as a result of supply being insufficient to address exponentially rising demand.

Today we see all the fundamental pre-conditions for such a battery metal super-cycle taking shape, driven by looming demand/supply imbalances. Looking at demand, a structural boost will likely come from huge multiyear public spending into commodity-intensive infrastructure and alternative low-carbon technologies, which are generally more metal intensive than existing carbon-based technologies. For example, electric vehicles will require four times as much copper than regular petrol or diesel cars. Looking at supply, the mining industry is not investing enough to meet the expected rising demand for battery metals. The largest investment grade miners have never been more disciplined in their capital allocation, with only a handful of large projects approved. In addition, the most promising projects are often located in remote or difficult jurisdictions, and may be delayed by local opposition or face higher costs from heightened environmental, social and governance (ESG) scrutiny on the part of stakeholders. Importantly, big complex projects usually take several years to complete.

The decarbonization agenda needs new giant copper, nickel and cobalt mines, but only lasting high battery metal prices can incentivize miners to undertake the required large, multiyear investment commitments to increase supply. Without these, the mining sector could become a bottleneck for the global decarbonization agenda and a lasting source of inflationary pressure.