Strong demand, scarce supply: Unearthing profits from critical raw materials in Latin America

Electric vehicle (EV) owners know the drill—the anxious search for a nearby charging station and not much time to spare. They may also understand that lithium, a key element in the manufacture of EV batteries, has been in painfully short supply.

Here’s what is less well known: A wide range of raw materials crucial to the energy and digital transitions (including the rise of AI), and to security broadly defined (national security, cybersecurity, energy security), is concentrated in a handful of countries in Latin America.

Chile and Peru produce 40% of the global copper supply, while Chile and Argentina supply 32% of the world’s lithium. Vital raw materials (notably copper, lithium, cobalt and nickel) are in strong and growing demand, and relatively short supply.

Surging demand

Copper and lithium may be the two most important raw materials for these transitions. Copper plays a key role in solar, hydro and wind energy systems. And in AI, it’s a game-changer: An AI data center requires three times as much power as a traditional data center, according to a recent report by J.P. Morgan Investment Bank, and will thus need much more copper. Demand for lithium looks set to accelerate, given its essential function in batteries for EVs and energy storage systems (8.9 kilograms—a significant amount—of the raw material makes its way into the average EV).13 

By any measure, demand for key raw materials is accelerating at a rapid clip, and the pace will only quicken with the digital and climate transitions. The International Energy Agency (IEA) projects that electricity consumption from data centers, AI and cryptocurrency could double by 2026. According to estimates from J.P. Morgan Investment Bank, this growth rate could imply an additional 3% in copper requirements—in other words, a 3% increase beyond what is factored into current demand expectations. 48

The energy agency also calculates that in a net-zero scenario, lithium demand would be expected to reach 717 kilotons (kt) by 2030 versus supply of a mere 485kt.

Prices look set to rise. BloombergNEF estimates that copper prices could jump 20% by 2027. Fortune Business Insights estimates that the global lithium market, valued at $22.2 billion in 2023, is anticipated to grow to $26.9 billion in 2024 and $134 billion by 2032.

Tightening supply

Surging demand will exacerbate an already tight mineral supply expected for the coming decade. 

For a variety of reasons (including a lack of infrastructure, greater demand for higher quality in refined products and political pushback to new projects), global production of several key minerals has grown at a relatively slow pace.

Spotlight on security

The gap between supply and demand of key raw materials exacerbates security concerns for both public policymakers and corporate executives. For example, of the 50 minerals identified as critical by the Department of Interior’s U.S. Geological Survey, the United States is 100% reliant on imports for 12 of them. It is 50% reliant for the next 29. As of 2023, the United States sourced the majority of these minerals from China.

Procuring a secure supply of lithium is now a top concern for technology companies and vehicle manufacturers across Asia, Europe and the United States. One result: Strategic alliances and joint ventures have been made between manufacturers (mineral consumers) and mining companies to ensure makers have a reliable and diversified base of suppliers.

Unlike Russia, say, another major source of raw materials for the energy and digital transitions, Latin America is seen as “friendly” territory to Western buyers.

Moreover, incentives under the U.S. Inflation Reduction Act (IRA) encourage manufacturers to source critical materials and/or assemble components in North America (which includes Mexico) or free trade partners. According to the Mexican Automotive Industry Association, the number of Mexico-made EVs exported to the United States each year has nearly doubled from 2021 to 2023, as automakers leverage partial tax credits from the IRA when these vehicles are sold in the United States.

Investment implications

The global mining sector presents perhaps the most direct way to access raw materials critical to the energy, digital and security transitions. We think market participants may underestimate the sustainability of mining company earnings and cash flows.

As a cyclical sector, mining could benefit from a recovery in global manufacturing as well as any stabilization in the Chinese economy. And on the manufacturing front, some mining companies have made headway in lowering their carbon emissions and managing water scarcity risks in Latin American countries.

For global investors, Latin America’s equity markets currently offer solid earnings and attractive valuations, both relative to global peers and their own histories. Latin American stocks trade at a 9x 12-month forward P/E versus a 10-year average of 12x. Latin America now ranks as the world’s least expensive equity region.14

Latin American equities may also enjoy the tailwind that comes from falling interest rates. Central banks in Latin America have already cut policy rates nearly 200 bps on average, leaving an additional 300 bps in potential cuts through 2024 and 2025. In addition, increasing exports could spur economic growth in the region and help boost profits for Latin American companies. Investors may choose to focus specifically on the global mining sector, or more broadly across capital markets. With either approach, they can find a wide range of opportunities to benefit from Latin America’s role supplying critical raw materials for the energy and digital transitions.