Opportunity for mining in the energy transition journey

The fortunes of South Africa’s mining sector have an outsize impact on the JSE, accounting for roughly a third of its total market capitalisation, and it is a highly cyclical and volatile sector. Miners also face significant challenges such as energy reliability, environmental impact, supply chain problems, and policy uncertainty, to name a few.  The mining sector influences and is influenced by various macro and local dynamics, such as the global economic growth outlook, China’s commodity consumption, and homegrown concerns like energy constraints, railway infrastructure challenges, etc. One of the ways we believe these local challenges can be addressed is through public-private partnerships. However, the just energy transition also presents an opportunity for mining both locally and globally. Currently, coal and gas, which are fossil fuels, account for just over 50% of global energy generation, while renewables stand at 20-25%. To meet our aspirations to mitigate climate change, we need to increase the use of renewables. As a result, the demand for renewable energy will increase significantly over the coming decades. 

However, as economies also need energy security, fossil fuels will remain a key part of the energy mix and investment in fossil fuels will be necessary for the foreseeable future (as seen in the chart). There is also a need to ensure that the energy transition is affordable for all countries.

From the chart, it’s evident that various commodities play an integral role in the energy transition. However, due to broad underinvestment in supply over the last decade, there are supply constraints in the energy transition journey. For example, to acquire enough copper for a successful energy transition we need to mine more than has ever been mined before. To put this into context, we would need to build 300-400 new copper mines globally over the next 10-15 years. Also, in order to achieve a just energy transition, we need to strike a balance between meeting current demand for commodities required in consumers’ everyday lives with the increased demand going forward for other commodities central to the energy transition journey. Otherwise, we run the risk of rising demand outstripping supply and causing price increases, which will in turn hinder the transition.  

However, the South African mining sector is coming to the party and seriously committing to renewable energy plans, both to reach their net zero aspirations as well as improve energy security against the backdrop of ramped up loadshedding.

When building portfolios and analysing the local mining sector, we carefully consider the risks and evaluate the opportunities over time. While faced with challenges, the mining sector is an important contributor to local economic growth, and looking ahead, will be critical in the energy transition. Mining sector positions in our M&G Equity and Dividend Maximiser Funds have contributed to alpha on an absolute and relative basis over the past 20 years, and we believe considered exposure will be valuable as the clean energy transition unfolds.