A new McKinsey report highlights significant supply risks for critical materials crucial to the global energy transition.

The Global Materials Perspective 2024 warns that shortages of metals like copper, lithium, and rare earth elements (REEs) could slow decarbonization efforts.

The report emphasizes surging demand for these materials, driven by the rise of low-carbon technologies such as electric vehicles and batteries.

Battery electric vehicles (BEVs) require 15-20% more materials than internal combustion engines, fueling this demand. Despite increased supply, shortages of critical resources are still expected by 2035.

The prices of lithium and nickel have dropped by 80% and 20%, respectively, but McKinsey says prices must rise further to encourage new production. For example, copper prices need to increase by 20% and lithium by 30% to attract investment in mining projects.

Technological shifts are reshaping demand patterns. Lithium-iron-phosphate (LFP) batteries have gained market share, growing from 25% to 40% between 2021 and 2023. Meanwhile, 40% of top automakers plan to use electric motors that rely less on REEs, reducing demand for these critical materials.

Geopolitical tensions remain a significant factor. China controls over 50% of global refining for many materials and has increased its ownership in key mining sectors. Recent export controls by China on materials like gallium and germanium further highlight global supply chain vulnerabilities.

While countries like the U.S. and EU enact policies to localize supply chains, McKinsey says this may not be enough. Despite these efforts, the report anticipates several critical materials—copper, lithium, and REEs—will face supply shortages by 2035.

Recycling and circularity are helpful but insufficient. McKinsey projects only a 15% reduction in emissions from the metals and mining sector by 2035, as decarbonizing materials production remains costly. The cost of deep decarbonization for steelmaking could increase production expenses by up to 40%.

There is also a disconnect between the cost of producing low-carbon materials and the willingness to pay for them. Only 15% of surveyed decision-makers are willing to pay a 10% premium for green materials by 2030, highlighting a barrier to decarbonization.

McKinsey calls for increased collaboration between industries, governments, and investors to address these challenges. Supply contracts, infrastructure investment, and regulatory clarity will be crucial to de-risking mining projects and scaling supply sustainably.

Without coordinated action, material shortages could slow the energy transition and jeopardize global decarbonization goals.