MiamBair

EMERGINGMARKETSDEBT

InvestmentManagement

MetalsoftheFuture2.0:HowtheEnergy

TransitionIsTransformingtheMetalsMarkets

Inthetwoyearssincewepublishedourresearchonelectricvehicles

(EVs)andmetals,we’veseenadynamicmetalsmarketunfoldbefore

oureyes.Thecopper,lithium,andnickelmarketsareundergoinga

rapidtransformation,drivenbythegreenenergyrevolution,whichhasspurredinvestmentsandinnovationtomeetthegrowingdemandof

EVsandrenewableenergy.Inthispaper,weexplorehowsupplyand

demandforsomeofthese“commoditiesofthefuture”havebeenshapedbythetransitiontoalow-carbonfuture.Wealsoexploregovernmentalresponsesfromemergingmarkets(EMs)totheseshiftingdynamics.

December2023

CorporateCreditAnalyst

AlexandraSymeonidi,CFA

DemandDynamics

Theenergytransitionfromtraditionalfossilfuelsto

renewableresources,aswellastheelectrificationofseveralglobaleconomicsectors,isnowevidentinthedemandforcopper,lithium,andnickel.Investmentsinelectricgrids

worldwidehaveacceleratedinthelastcoupleofyearsasaresultofinvestmentsinrenewablepowersystemsandtheinfrastructureneededtosupporttheelectrification

oftransportationandothersectors.

Copper

AccordingtotheInternationalEnergyAgency(IEA),

globalinvestmentinelectricitygridsincreasedaround

8%in2022.Chinahasledthisgrowth,withinvestmentsingridandinfrastructureup28%year-over-yearfrom

JanuarytoOctober2023.Chinesedemandforcopper

nowconstitutes60%oftheworldtotal.Whiledemandforallcopperusesishigherthanhistoricalrecords,demandforwire,whichhasmultipleusesinthegridandEV

infrastructure,hassignificantlyoutperformeddemandforothercopperusesinChina.

InEurope,EVsalescontinuetoadvance,withEV

registrationsrecordingawhoppingcompoundannualgrowthrate(CAGR)of55%from2017to2022.Gridandinfrastructureinvestments,coupledwithEVadoption,constitutethelargestconsumersofcopperworldwide,strengtheningcopperdemandresilienceinthefaceofcurrenteconomicchallenges.

EXHIBIT1

ChinaElectricityInvestments,GridandInfrastructure(inBillionCNY)

1,400

1,200

1,000

800

600

400

200

0

201720182019202020212022First10Months,First10Months,

20222023

Sources:BloombergandWilliamBlair,asofOctober31,2023.

2|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET

DemandDynamics(continued)

EXHIBIT2

ChinaCopperDemand(Uses)

180

170

160

150

140

130

120

110

100

90

802/213/214/215/216/217/218/219/2110/2111/2112/211/222/223/224/225/226/227/228/229/2210/2211/2212/221/232/233/234/235/236/237/238/239/2310/2311/23

Tube(Construction)

Wire(Grid)Rod(Grid/ElectricApplications)PlateandSheet(Industrial/ConsumerDurables)

Sources:BloombergandWilliamBlair,asofAugust31,2023.Indexedto100inDecember2020.

EXHIBIT3

EVRegistrationinEurope

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

CAGR55%

201720182019202020212022

Sources:InternationalEnergyAgency(IEA)andWilliamBlair,asof2022.

WILLIAMBLAIRINVESTMENTMANAGEMENT|3

DemandDynamics(continued)

4|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET

Lithium

Amongallcommoditiesofthefuture,lithiumhasprobablyundergonethegreatesttransformation.Theelectrificationoftransportationhasdrivenacolossalshiftinthedemandcompositionforlithium,whichhadaCAGRof23%from

2017to2022.EVbatteriesarethebiggestcontributortothisdynamic,nowrepresentingmorethan50%oftotaldemandforlithium(upfromabout30%in2017).Otherusesoflithiumincludeconsumerelectronics(which

uselithium-ionbatteries),glassmaking,ceramics,andpharmaceuticals.

EXHIBIT4

Lithium’sShareofCleanEnergyDemand

2022

56%30%

2017

OtherDemandCleanEnergyDemand

Sources:InternationalEnergyAgency(IEA),GlobalData,andWilliamBlair,asof2022.

“Amongallcommoditiesofthefuture,lithiumhasprobablyundergonethe

greatesttransformation.”

AlexandraSymeonidi,CFA

DemandDynamics(continued)

WILLIAMBLAIRINVESTMENTMANAGEMENT|5

Nickel

Nickeldemandhasbeenacceleratinginthelastthree

years.Itgrew11%in2022andisexpectedtogrowanother14%in2023.Forcontext,demandgrowthformost

industrialmetalsiscomparabletoglobalannualgross

domesticproduct(GDP)growth,whichhasbeenmuch

lowerthanthedouble-digitgrowthexperiencedinnickel.ThisgrowthisaresultofnickelbeingusedasacomponentofEVbatteries.Thecompositionofnickeldemandhas

beenchangingtoo.Cleanenergynowconstitutes16%oftotaldemand,upfromjust6%in2017.

EXHIBIT5

Nickel’sShareofCleanEnergyDemand

2022

16%

6%

2017

OtherDemandCleanEnergyDemand

Sources:InternationalEnergyAgency(IEA),GlobalData,andWilliamBlair,asof2022.

EXHIBIT6

GlobalNickelDemand(InThousandTonnes)

4000

CAGR10.2%

3500

3000

2500

2000

1500

20192020202120222023E

Sources:StatistaandWilliamBlair,asof2022(2023isestimated).

6|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET

SupplyDynamics

Thesupplyresponsetotheverypronounceddemand

shiftsobservedinthesemetalshasbeenremarkable.

Automakers,equipmentmanufacturers,andbatterycellmakersallwanttogetinvolvedinthevaluechainofthesecriticalmetals.Asweillustratedinourpreviouspaper,

demandforthesemetalsisexpectedtoaccelerateevenfurther,raisingquestionsaboutscarcityandtheabilityofsupplytomeetdemand.

Copper

Whilecopperminersrecognizecopper’simportance

forgreentechnologies,productionischallenging.

Copperminershavefacedincreasedregulatoryscrutiny,agingassets,declininggrades(theconcentrationof

copperintheorebeingmined),andchangingweather

patterns,includingpronounceddroughtsinChileand

floodinginZambia.Globalcoppersupplyhasgrownonlyinthelow-single-digitlevelsoverthepastthreeyears,

withnewprojectsinPeruandtheDemocraticRepublicofCongomostlyoffsettinglowerproductioninthe

world’slargestcopperproducingcountry,Chile.This

hasresultedinmarketdeficitsoverthepastthreeyears.In2023,asurplusisexpectedduetolacklusterdemandfromdevelopedmarkets.

Despitethesedynamics,copperminersareramping

upinvestmentstofulfilthehighanticipateddemand.

Capitalexpendituresinthe10largestminers,which

representabout44%ofglobalproduction,increased13%in2022andareexpectedtogrowanother14%in2023.

EXHIBIT7

CopperMarketBalanceandInvestments

-12%18%13%14%

200,000

100,000

0i

-100,000

-200,000

-300,000·2020202120222023E·

MarketBalanceinTonnesAnnualGrowthofCapitalExpenditures,Top10

CopperMiners

Sources:InternationalWroughtCopperCouncil,Nornickel,Bloomberg,andWilliamBlair,asof2022(2023isestimated).

“Copperminershavefacedincreased

regulatoryscrutiny,agingassets,

declininggradesandchangingweatherpatterns,includingpronounced

droughtsinChileandfloodinginZambia.”

AlexandraSymeonidi,CFA

WILLIAMBLAIRINVESTMENTMANAGEMENT|7

SupplyDynamics(continued)

Lithium

Thesupplyoflithiumishighlyconcentratedinafew

locationsandcompanies.Thetwolargestlithium

operationsintheworldaccountedfor43%oftotallithiumproductionin2022.Still,lithiumsupplyhasincreasedto

meetthegrowinguseofrechargeablelithium-ionbatteries,whicharewidelyusedinconsumerelectronics,EVs,and

energystoragesystems.Abriefdeclineoflithiumcarbonatepriceswasobservedin2020asaresultofsupply-demand

dynamics,butpricespeakedin2022.Thusfarin2023,

lithiumproductionhassurpassedconsumption,resultinginanabruptpricecorrectionfromall-timehighs.LowerEVsales,inventorybuild-upintheenergystoragesector,demanduncertaintyinChina,andnewsupplycoming

onlinefasterthananticipatedarekeyreasons.

Anaccelerationindemandgrowthisanticipatedfor

lithium,promptingproducerstoexpandtheirinvestmentsinthesector.Capitalexpendituresinthefivelargestlithiumproducersworldwide,whichaccountfor65%oftotal

production,grew53%in2022andareexpectedtopickupanother66%thisyear.

EXHIBIT8

CapexGrowthintheTopFiveLithiumProducers

132%

75%

66%

53%41%

19%

19%

-30%

20162017201820192020202120222023E

Sources:BloombergandWilliamBlair,asof2022(2023isestimated).

EXHIBIT9

LithiumDemand,Supply,andMarketBalances(ThousandTonnes)

140

120

100

80

60

40

20

0

2016201720182019202020212022

Demand(LeftAxis)Supply(LeftAxis)MarketBalance(RightAxis)

Sources:InternationalEnergyAgency(IEA)andWilliamBlair,asof2022.

20

15

10

5

0

-5

SupplyDynamics(continued)

8|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET

Nickel

Alongsidelithium,nickelhasprobablyseenthelargestexpansioninproductionvolumescomparedtoother

metals.Since2019,Indonesia,whichaccountsfor50%ofglobalnickeloreproduction,hasrapidlydevelopeddomesticprocessingfacilitiesinanattempttocapturemorevaluefromthemetalandtobecomeaglobalEVsupply-chainhub.Accordingtogovernmentestimates,thevalueofprocessednickelproductsin2022was

$30billion,10timeshigherthanitwasfouryearsago.Indonesiaincreasedthenumberofoperatingsmeltersfrom15in2021to43thisyear;another28smeltersareunderconstructionand24areintheplanningstages.

It’sworthhighlightingChina’scontributiontothis

expansion.Thecountryhasmadeinvestmentsofaround

$30billion,andtwoofthelargestnickelindustrialhubs

(theMorowaliIndustrialParkandtheWedaBayIndustrialPark)areoperatedbythesameChinesecompany.This

investmentstandsoutasoneofthelargestunderChina’sBeltandRoadInitiative(BRI).

ThisvastincreaseinsmeltingcapacityledIndonesia

tobecomeanetimporterofnickeloreforthefirsttime

initshistoryin2023.However,themostsignificant

consequenceofthisexpansionisthattotalprimarynickelproductionhassurgedtopeaklevelsleadingtomarket

imbalances.TheInternationalNickelStudyGroupexpectsthisyear’ssurplustobethelargestinthelastdecade.

EXHIBIT10

NickelMarketBalanceandPrice

300

200

100

0

-100

-200

201220132014201520162017201820192020202120222023E

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0

BalanceinThousandTonnes(LeftAxis)PriceinDollarsperTonne(RightAxis)

Sources:InternationalNickelStudyGroup,Bloomberg,andWilliamBlair,asof2022.Balance(leftaxis)isinthousandtonnes.Price(rightaxis)isindollarspertonnes,year-to-date.

WILLIAMBLAIRINVESTMENTMANAGEMENT|9

EMResourceNationalism

Countriesinwhichminingforthemetalsofthefuture

hasmadeupasignificantpartofGDPhavetakenanactivestancetowardthedevelopmentandcommercializationoftheseresources.SeveralEMgovernmentsrecognizethe

valueofthesemetalstofuturetechnologiesandaimto

capturealargershareofagrowingpie.Belowwehighlightsuchcases.

Copper

Chile,thetopproducerofcopper,finalizedanamendmenttoitsminingtaxregimein2023.Theregime,nowroyalty-based,willincreasetaxesfrom5%to14%ofoperating

profitsto8%to26%ofoperatingprofitsforlargeproducers.Thenewroyaltywillalsohaveanad-valoremcomponentof1%.Whilethecalculationoftaxableincomehaschanged,

thenewroyaltyregimepromisestoincreasestaterevenuesfromthesector,especiallyinahigh-priceenvironment.

In2019Zambiareviseditsroyaltyratesfrom4%to6%

ofoperatingprofitsto5.5%to10%ofoperatingprofits,

dependingonprices.Copperexportsaccountforasmuchas12%ofZambia’sGDP,makingtheresourcecrucialtoitseconomicdevelopment.

InPanama,theminingconcessioncontractforthecountry’slargestcopperminerecentlysparkedunprecedented

protestsduetoitsimpactontheenvironmentandthe

distributionofprofitsbetweenthemineoperatorandthestate.InlateNovember,Panama’ssupremecourtruled

thecontractunconstitutional,whilethemine,which

contributes3%to5%tothecountry’sGDP,halted

operationsduetoblockades.Earlierinthesamemonth,Panama’sCongressbannednewminingconcessions

andextensionsofcurrentconcessions.Certainly,thisexemplifiesacaseofresourcenationalism,inwhichacountryassertscontroloveritsnaturalresources.

Lithium

China’spushtobecometheworld’stopsupplierof

solarcells,lithium-ionbatteries,andEVs,isdrivingtheneedforthecountrytosecurealargeshareof

thelithiumsupplychain.Indeed,ChinahasinvestedbillionstoacquirestakesinlithiumminesinLatin

AmericaandmostrecentlyAfrica.Accordingto

BenchmarkMinerals,two-thirdsofforecastlithiumproductionwillbeownedbyChinain2030.

“AccordingtoBenchmarkMinerals,twothirdsofforecastedlithiumproductionwillbeownedbyChinain2030.”

AlexandraSymeonidi,CFA

Chile,whichishometotheworld’slargestlithiumreserves,announcedearlierthisyearastrategytonationalizeits

lithiumindustry.Thestrategywouldallowthestatetoleadlithiumminingandprocessingprojectsthroughnational

companies,therebyensuringalargerrevenueshareto

thestateandbetterenvironmentalconditions.Underthe

currentregime,independentlithiumproducersareleasingmineralconcessionsfromagovernmentalorganization

calledCorporacióndeFomentodelaProducción(CORFO).Theseleasescontributedmorethan$5billiondollarstotheChileantreasuryin2022,about2%ofthecountry’sGDP.

ButChileisnotthefirstcountrytonationalizeitslithiumresources.Earlierin2022,Mexicodeclaredlithium

asastrategicmineral,meaningthattheexploration,

exploitation,andend-useoflithiumwillbeanexclusive

rightofthestate.ThecountryhassetupanationallithiumcompanythatwillseektoestablishMexicoasaprominentlithiumminingnation.

Nickel

PerhapsanotherexampleofresourcenationalismhasbeenthebanonexportsofnickeloresfromIndonesia.Initiallyimplementedin2014andreinforcedin2020,theban

soughttodevelopdomesticnickelandEVsupplychains.Partofthestrategytodevelopthedomesticmarketistaxincentivestonickelprocessingfacilities.Thegovernmenthasrecentlyrevokedthe10-yeartaxholidayforlow-gradeproducerstoencouragemoreinvestmentindownstreamprocessesandbattery-gradenickelmanufacturing.

10|METALSOFTHEFUTURE2.0:HOWTHEENERGYTRANSITIONISTRANSFORMINGTHEMETALSMARKET

InvestmentImplications

Webelievethelikelihoodofenduringdemandformetalsofthefutureduetotheenergytransitionbodeswellfor

marketprices.Forthecorporatecreditinvestor,this

shouldtranslateintorobustcreditfundamentals,suchasmarginsandcashflows.

Moreover,manymetalcompaniesintheEMdebtuniversehavereducedleverage,whichcouldhelpthemwithstand

metalpricevolatility.

Maturitiesareaddressedwellinadvance,whilewehavenoticedaninvestorpreferencefordebtissuedby“futuremetals”companiesincontrasttoothermetalsproducers.

Aswehavehighlighted,companiesrichinfuturemetalscouldincreasinglybenefitfromtheproductionandsaleoftheseminerals.

Forthecountriesmentionedabove,themetalssector

shouldcontinuetobeastrongdriverofGDPandattractforeigndirectinvestment(FDI).

Webelievetheexportvalueandtaxrevenuefromthese

metalscouldincreaseduetohigherproductionanda

resilientpriceoutlook,andovertimethisshouldleadtoanimprovementinsovereigncreditfundamentals,which

isappealingtothesovereigninvestor.

“Webelievetheexportvalueandtax

revenuefromthesemetalscould

increaseduetohigherproductionandaresilientpriceoutlook,andovertimethisshouldleadtoanimprovementinsovereigncreditfundamentals,whichisappealingtothesovereigninvestor.”

AlexandraSymeonidi,CFA

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