Commodity Price Volatility

The global shift towards more sustainable energy and transportation solutions has dramatically increased the demand for metals like lithium, nickel, copper, and cobalt. These are essential for manufacturing the batteries that power electric vehicles (EVs) and support other renewable energy technologies.  

As a result, the mining industry is dealing with fluctuating commodity prices, which are central to this surging demand. The global battery metals market was valued at USD 13.30 billion in 2022 and is projected to reach USD 27.36 billion by 2031, growing at a compound annual growth rate (CAGR) of 8.35%.

Being the first link in the supply chain, the mining industry is increasingly prioritising the strategic management of this volatility. In this blog, we explore the global role, impact, and actionable outcomes of mining for battery metals in a dynamic market. 

Battery energy storage plays a pivotal role in the energy transition, enhancing renewable energy generation and improving grid reliability for consumers by accounting for intermittency. In this global shift, the importance of battery metals cannot be overstated.

Lithium-ion batteries, the predominant technology powering electric vehicles, rely heavily on lithium, cobalt, copper, and nickel. Australia is a global leader in lithium production, thanks to its rich spodumene deposits, while the Philippines and Indonesia are key players in nickel production.

Meanwhile, North America is increasing its efforts to establish a more localised supply chain for these vital materials, with recent developments in regions like Nevada’s Lithium Valley.  

Market dynamics, including supply and demand fluctuations, geopolitical tensions, and technological advancements significantly impact the commodity prices of these minerals.  

For example, the global surge in demand and positive sentiment for EVs in the late 2010s dramatically increased lithium prices. In contrast, breakthroughs in battery technology which lessen the dependency on cobalt, as well as its recent oversupply, have somewhat moderated its price. Copper prices have been much more stable, rising by a modest 2% throughout this period due to increased demand colliding with a slow increase in mining supply.

Price volatility poses considerable challenges for the mining industry. It impacts operational costs and leads to fluctuations in revenue. Sharp increases in metal prices may temporarily boost profitability but also prompt excessive investment in production capabilities.  

Conversely, significant price drops can compromise operational viability, potentially resulting in mine closures and layoffs, as well as reduced investment in new projects or necessitating revised economic assessments. Addressing commodity price volatility is essential for maintaining profitability, as these fluctuations are expected to continue.  

According to McKinsey, commodity prices have shown annualised volatility ranging from 10 to 20 percent over the past four years. Each year, price variations reach up to 70 percent of the average price, driven by geopolitical and climatological uncertainties. 

Lithium, essential for lithium-ion batteries in EVs, has seen prices soar due to heightened demand in recent years.

While it's challenging for mining companies to predict fluctuations in commodity demand and prices accurately, they can adopt specific strategies to navigate market volatility effectively:

1. Enhance portfolio management  

Traditional portfolio evaluation tools often focus solely on asset valuations that reflect past price behaviours, which may not reveal long-term strategic benefits. Mining companies can improve their approach by:

• Utilising synergies across their portfolio to maintain resilience under various market conditions.
• Base investment decisions on aligning supply with demand forecasts for specific commodities.
• Align portfolios with future growth sectors.

2. Achieve integration

Large, diversified mining companies enhance integration between production and trading operations to maximise end value and better control prices. Mid-tier operators can seek similar advantages through strategic joint ventures and consolidations.

3. Connect value with price

Many mining firms possess valuable projects that aren’t adequately represented in their market valuation. A thorough audit review can help these companies ensure their assets are fully valued on their balance sheets, thereby addressing the discrepancy between actual value and market price.

4. Increase discipline  

As resource-intensive economies adjust to a lower growth rate from China and a less commodity-intensive growth cycle globally, mining companies should:  

• Sharpen their focus on productivity, cost, and supply discipline.  
• Reduce production, postpone or scale down expansion projects, or shut down less profitable operations.
• Focus on shareholder returns and productivity improvement over expensive capital projects.
• Enhance productivity through improved management of supply chains, working capital, and contractors.  
• Optimise site efficiency through strategic mine sequencing.
• Restructure mine portfolios to favour assets that offer higher returns and lower costs.

By adopting these strategies, mining companies can better prepare for and adapt to the market’s unpredictable dynamics. 

Despite the surging demand for battery metals, the industry has seen periods where the supply significantly exceeds demand. For example, lithium supply is expected to increase by 30% in 2024.  

Driven by the anticipation of growing demand, the mining sector has sometimes expanded production capacities beyond what is necessary. This trend was particularly visible in the lithium market during the late 2010s, when high lithium prices triggered a wave of new mining projects and expansions, vastly increasing global lithium production capacity. With the overall trend still likely to be positive, this has lead to recent drops in the price of lithium.

Adding to this dynamic, advancements in recycling technologies have enabled more efficient reintegration of these materials into the supply chain, further exerting downward pressure on prices. Such an oversupply creates a challenging scenario for mining companies, forcing them to make tough decisions between scaling back production — risking a loss in market share if demand suddenly surges — or continuing to produce at a loss. 

Recently, the industry has shifted towards a more cautious approach for expanding capacity. Businesses are progressively implementing plans that react to market signals. Additionally, advancements in battery technology and variations in the usage of materials — such as the rising use of nickel-rich chemistries and lithium iron phosphate (LFP) batteries — are shaping mining approaches.

While the copper mining industry continues to be slow to grow, demand is expected to double by 2035. Renewed demand from Chinese manufacturers along with the booming investment in renewable energy, EVs, and AI, are expected to contribute, though there is an increased awareness of the possibility of sudden and adverse geopolitical developments to cause dramatic price shifts.

Global trade policies and alliances continue to be crucial in this evolution. For example, the initiative by the US government to cultivate domestic supply chains for essential minerals has spurred new mining projects in North America, with the goal of reducing reliance on geopolitically unstable areas.

The Asia-Pacific region is the world’s top revenue contributor, projected to exhibit a CAGR of 8.45% over the forecast period. The battery metals market leads the pack in this region, with China, Japan, India, South Korea, and Australia being key drivers of its growth. Asia Pacific’s high population and economic progression fuel this expansion, boosting the electricity and consumer electronics sectors.  

The lithium-ion battery market offers significant potential in China and Japan, where well-established manufacturers like AESC, Panasonic, and China BAK Battery, Inc. are based. India is expected to experience the highest CAGR in the global battery metals market, driven by the country's increasing focus on e-mobility and consumer electronics. 

Mining companies across Australia, Asia, and North America have demonstrated varied responses to current market conditions. Australian firms have taken the lead in sustainability and adopted innovative extraction technologies, gaining a competitive advantage in markets that prioritise environmental considerations.  

In July 2023, the Australian Government committed A$57.1 million to establish strategic and commercial partnerships to develop new, diverse, resilient supply chains supported by critical mineral processing within Australia. This initiative follows the revision of ESG standards in December 2022.  

Significant investments have been made in securing mining operations overseas and advancing recycling technologies in Asia, particularly in China. Meanwhile, North American companies are utilising advanced geological surveying methods and forming strategic partnerships and alliances to enhance their supply chains and mitigate future price fluctuations. 

Different regions and mining companies employ various strategies to manage and respond to the price volatility of metals.

Commodity price volatility, particularly affecting battery metals vital for energy transition, remains a significant challenge for the mining industry. However, the industry continues to innovate and adapt through these complex dynamics, with investments in technology aimed at increasing yield and efficiency.  

As the industry adjusts to changing market dynamics, it must balance expanding production capacity and upholding sustainable mining practices to meet the growing global demand for clean energy and transportation solutions. This balance will be crucial in shaping its future. 

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