Energy and metals traders can tap into a rapidly growing value pool by bringing greater liquidity and risk management tools to a lucrative but underfunded market, a report by McKinsey says. 

The value of commodity trading pools nearly doubled from 2021 to 2022, reaching US$99bn in trading earnings before taxes and interest, finds the report, published on September 26.  

It also says commodities are “currently significantly underpriced” despite rising demand driven by the energy transition. 

However, investment in metals and minerals critical for the energy transition is lagging well behind the level needed to ensure long-term supply. As a result, demand for some materials, such as copper, lithium and boron, is likely to far outstrip supply within the next seven years, it says. 

“Traders can capitalise on this opportunity by supporting increased liquidity and price discovery in rapidly evolving metals and minerals markets,” says McKinsey partner Roland Rechsteiner, an author of the report. 

Larger traders also have the market expertise to provide tailored ESG-related products in different markets, and the risk management capabilities to provide services to companies entering these markets for the first time, the report says. 

“Traders could accelerate development by pre-financing junior mines and helping producers gain access to markets,” adds Spencer Holmes, an associate partner at McKinsey and report co-author.  

“Metals and minerals producers could also encourage long-term supply deals to pre-finance projects.” 

Though traders have earned lucrative revenues from the hydrocarbons sector in recent years, the report says shifting focus from fossil fuels to low-carbon energy sources would create significant long-term opportunities. 

“Players that wait for liquidity as markets develop will find their options limited,” it says. “Producers, traders, and big energy companies can take actions to develop new capabilities, expand into different parts of the value chain, and pursue new opportunities.” 

McKinsey adds that delays in boosting production are likely to inject volatility and uncertainty into the markets, resulting in price spikes. 

The call to action follows warnings that production of metals and minerals used in electric vehicle batteries and renewable power generation is being severely hampered by a lack of financial support. 

The energy sector appears to be prioritising debt repayment and dividends over investing capital in new projects, while investors have favoured sectors such as technology and healthcare, McKinsey says. 

In the case of mining, low commodities prices and long lead times are “exacerbating supply chain shortages for green technologies”. 

The International Energy Agency (IEA) says that in clean energy alone, a “much faster shift” in investment is needed to reach net-zero emissions by 2050 – particularly in developing economies. 

By 2030, an average of US$10 needs to be invested in clean energy for every US$1 invested in fossil fuels, yet developing markets “struggle to finance new projects due to rising debt levels and tightening fiscal conditions”, it says. 

“Some have seen access to external financing closed off,” the IEA says. “Large emerging economies such as Brazil, India, Indonesia, Mexico and South Africa can raise capital, but it costs two- to three-times more than in advanced economies.” 

The lack of investment is creating a “looming supply and demand gap for critical minerals”, it says, with announced projects for nickel and lithium falling well short of projected demand by 2030. 

Globally, a record US$1.8tn was invested in clean energy in 2023, but this needs to grow to around US$4.5tn a year by the early 2030s, the agency adds.