Looking upstream: A path to unlocking low-carbon, circular materials

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Many value chains need to collaborate to create low-carbon, circular materials for complex products. This overview offers a guide on where to start for materials producers and downstream customers.

Materials value chains are complex and span the entire globe, and they represent 20 percent of global greenhouse gas (GHG) emissions. To reach net-zero targets, the world is undergoing a materials transition in tandem with the ongoing energy and mobility transitions.1Global Materials Perspective 2024, McKinsey, September 17, 2024.

About the authors

This article is a collaborative effort by Karel Eloot, Michel Van Hoey, Peter Spiller, and Sebastian Göke, with Vladislav Vasilenko, representing views from McKinsey’s Global Energy & Materials Practice.

Organizations around the world are making net-zero and circularity pledges to support this transition and decarbonize. Increasingly, consumers and governments are championing regulations and policies that promote a circular economy, signaling a paradigm shift in public sentiment toward sustainable practices, which fundamentally strengthens the business case for transitioning to low-carbon, circular materials. However, many companies experience challenges in building integrated perspectives about materials value chains because of, among other factors, the broad scope of materials they use and limited visibility on operational drivers and interdependencies, especially further upstream in the value chain.2The Scope 3 challenge: Solutions across the materials value chain,” McKinsey, May 5, 2023.

This series aims to shed light on decarbonization and circularity opportunities across materials’ value chains—such as those for plastics, copper, aluminum, rare earth elements, and glass—to help companies navigate the materials transition.

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Materials Circularity

This series by McKinsey is a practical resource for leaders looking to build circular value chains.

Explore the series

For the chosen materials, we explore the main sources of emissions, untapped circular materials pools, potential decarbonization pathways and their technical and economic feasibility, and key unlocks to scale decarbonization and circularity. These insights can help downstream companies work with their supply chains to drive change, all with the goal of achieving emission-reduction targets, managing limited resources, and meeting circularity objectives (a key lever to decarbonization) in a cost-efficient way. To create a common fact base for discussion among stakeholders, this article offers a high-level primer on the challenges and opportunities of decarbonization and the creation of circular materials value chains.

Decarbonizing the production of materials will be critical for overall decarbonization

The production of materials is responsible for approximately 20 percent of global GHG emissions today, making tackling materials-related emissions a critical objective for companies looking to decarbonize.

Materials account for 20 percent of global greenhouse gas emissions.
Image description: A two-part chart shows a pie chart on the left and several donut charts on the right. On the left, the pie chart shows global greenhouse gas (GHG) emissions excluding land use change for 2021. Of approximately 50 metric gigatons of emissions, 20% comes from materials-related emissions. On the right, donut charts break down several materials’ contribution to the 20% of materials-related GHG emissions. Iron and steel contribute the most at 7%, followed by cement at 5%, coal and other energy mining at 3% to 4%, and plastics at 3%. Other materials, including other chemicals, aluminum, copper, battery and precious materials, and glass, each contribute 1% or less. Source: GWP100 End of image description.

Emission intensity and hotspots of emissions vary considerably by material

A cross-materials view on emissions shows that for some materials, such as aluminum and copper, decarbonizing Scope 2 emissions (indirect emissions from electricity usage) will go a long way. However, other value chains, such as those for steel and nickel, will need to address Scope 1 (process) emissions to decarbonize effectively.

Processing accounts for the majority of materials emissions, but the magnitude and distribution of emission hot spots vary considerably by material.
Image description: Three horizontal bar charts show, from left to right, the demand in million metric tons (Mt) for 2035, primary emissions from mining and processing by step for 2023, and primary emissions from mining and processing by source for 2023 for five materials: steel, aluminum, copper, nickel, and lithium. Total emissions for each material is shown on the right. For demandfor 2035, steel is expected to have the highest demand at 2,010 Mt and lithium is expected to have the lowest demand at 5 Mt. The primary emissions of mining and processing by step for each material come from processing, except for copper: its primary emissions come from mining. The primary emissions from mining and processing by source are segmented by electricity (Scope 2), fuel (Scope 1), and process (Scope 1). For steel and nickel, most emissions come from process, while for aluminum and copper, most emissions come from electricity. Lithium’s emissions are split evenly between electricity and process. Nickel has the highest total primary emissions at 50 Mt CO2/Mt. Lithium and aluminum have the second highest at 15 t CO2/t each, followed by copper at 4 Mt CO2/Mt and steel at 2 Mt CO2/Mt. Source: MineSpans, IEA, Industrial Transformation 2050 (Material Economics, 2019), Statista, World Steel Association, International Copper Association, International Aluminum Institute, Transition Pathway Initiative End of image description.

In the coming years, demand growth for low-carbon, circular materials is expected to outstrip additions to supply capacity

As pressure for decarbonization and derisking of supply chains grows, so does material demand. Demand growth is expected to accelerate because of the higher material intensity of low-carbon technologies (as compared with conventional technologies) and fundamental shifts in materials footprints. For example, we expect 1.4 to 6.3 times higher material intensity for solar and wind, respectively, and an unprecedented need for materials such as lithium and rare earth metals.1Global Materials Perspective 2024, McKinsey, September 17, 2024; McKinsey MineSpans.

While there is no principal shortage of most materials available in Earth’s crust,2 it’s unknown how quickly capacities (especially for low-carbon or circular materials) and supporting infrastructure can be added to meet rising demand, which has already led to price spikes for some materials today.

For recycled and other low-carbon materials, there is additional uncertainty related to how green premiums could evolve in the face of already-rising materials costs, requiring companies to act to secure supply.

In the journey toward low-carbon, circular materials, understanding unit economics will remain crucial, and the slow maturation of a premium market could be a bottleneck for broader development.

Most low-carbon and recycled materials are highly likely to become scarce in the next five to ten years.
Image description: A horizontal bar chart shows the total demand and supply in metric tons for 2025 and 2035, the difference between total demand and supply, and the expected premium for four materials. Materials are grouped into three archetypes. In the overall tight market archetype, copper is expected to have a –15% to 0% difference between supply and demand. In the structural low-carbon undersupply archetype, flat low-carbon steel and high-quality recycled plastics are expected to have a –20% to 40% and –50% to 60% difference in supply and demand, respectively, as well as high premiums. In the final archetype, growing low-carbon demand and supply, low-carbon and secondary aluminum are expected to have a 0% difference between supply and demand, with a low or no premium. End of image description.

Some abatement levers work across different materials value chains

From the perspective of a downstream consumer, decarbonizing value chains requires an end-to-end approach tailored to the emission hot spots of each commodity (from raw material to production and preparation to tier-one manufacturing).

Renewable electricity will be part of most pushes for decarbonization across value chains. Many materials will also require carbon transparency along the chain to inform industry and materials-specific abatement levers such as process adaptations and sourcing of low-carbon materials and consumables.

Importantly, circularity has the potential to address emissions across industries and value chains. However, to increase recycled content in their products, companies need a detailed understanding of current barriers and unlocks. One important area of focus could be tapping new secondary pools instead of competing for already-scarce existing supplies of secondary materials.

Value chain players can increase abatement using renewable energy and industry-specific levers, enabled by carbon transparency.
Image description: A honeycomb chart shows the typical abatement levers within materials value chains. Levers are grouped by three categories: enabler, renewable energy, and industry-specific abatement levers. In the enabler category, carbon transparency along chain is at the center of the honeycomb chart. The other two categories are arranged around the center. The renewable-energy category includes renewable electricity (tier-1), fuel switch (tier-1+n), and renewable electricity (tier-n). The industry-specific abatement levers include recycling, low-carbon sourcing of materials (tier-1+n), and process adaptations (tier-1+n). End of image description.

Access to scrap and recycled materials is critical

Based on our assessment of the state of recycling across materials, we see five cross-industry themes for secondary materials:

  1. Pre- and postconsumer scrap. According to McKinsey analysis, for most materials, preconsumer scrap recycling could reach its technical limits (that is, greater than 80 percent) by 2035 if industries invest in innovation in areas supported by economics and policy. This means that companies interested in securing additional volumes will need to think through how to tap new secondary pools (such as those from end-of-life products—that is, postconsumer scrap) or use existing pools more effectively (for example, by avoiding downcycling). Specifically, materials such as aluminum are often commingled in manufacturing processes and products, making it difficult to recover and preserve specific alloys and limiting recycling of mixed scrap to cast alloys. Such challenges present opportunities to diversify the supply from primary materials, expand into new regions, and engage new stakeholders.
  2. Collection. Increased collection is a gateway to access incremental material streams across most commodities, especially for materials with significant exposure to nonindustrial applications (for example, from waste, electrical, and electronic equipment recycling). While regulators are in part already addressing this circularity opportunity, companies could tap additional volumes through partnerships and build specific e-waste recycling channels and infrastructure.
  3. Technology. Addressing technological barriers along the secondary value chain could become a key enabler to advance recycling. For example, dismantling technology could help tap pools of secondary magnetic rare-earth elements currently lost in electronics and home appliances because of a lack of preseparation. Advanced sorting could also provide access to high-quality feedstocks of aluminum scrap or plastic waste.1Advanced recycling: Opportunities for growth,” McKinsey, May 16, 2022. There are also monomer- or solvent-based recovery technologies to unlock virgin-quality recycled plastics. However, these technologies need to scale and become cost-competitive. Importantly, while some recycling processes, such as mechanical recycling and methanolysis, offer lower-carbon alternatives, others, such as pyrolysis, may result in carbon emissions similar to those of producing virgin plastics, highlighting the need for careful selection of recycling technologies based on their environmental impact.
  4. Alliances. Reaping the fruits of circularity requires stakeholders across the value chain to collaborate to make sure the value of complex, postconsumer material streams can be realized effectively, such as through offtakes to pool demand and diversify risk. For example, various aluminum grades originating from sorting mixed aluminum scrap may need different offtakers, which can help improve unit economics via scaling and accelerating the technology learning curve. Alternatively, value chain partners can collaborate on building closed-loop integration to lower production costs.
  5. Multimaterials plays. Approaches aiming to recover multiple types of material at once will become more interesting in areas where the bulk of the value has been already extracted, but some critical materials, such as tin, tantalum, and other materials in printed circuit boards, remain untapped. These strategies will need to integrate into existing value chains and process flows to be cost-competitive, potentially with the addition of premiums to meet industry hurdle rates.
Barriers and unlocks for circularity vary by material; access to scrap is key across commodities.
Image description: A multipart chart shows horizontal bar charts on the left and a checklist table on the right. On the left, the horizontal bar charts show recycled material share and share of recycling scrap by source in percent for ten commodities, which are listed on a high to low scale. Share of recycled scrap by source is broken down in percent by production and end of life for each material. On the right, the checkmark table shows material-specific circularity barriers and material-specific unlocks for 2035 for each of the commodities. Material-specific circularity barriers include collection, dismantling, sorting, and recovery and are marked where applicable for each material. Material-specific unlocks include regulation, technology, alliances, and feedstock and are marked where applicable for each material. There are five numbered and highlighted sections of the chart, indicating key cross-industry themes for secondary materials, listed in order: end of life, collection, technology, alliances, and multi-materials plays, which include rare-earth element magnets, cover glass, and tantalum commodities. Source: Secondary materials models, expert interviews End of image description.

Unlocking new pools of secondary materials could save on carbon costs

Looking into new pools of secondary supply across materials, we find that most materials will be marginally more expensive than their primary counterparts from today’s perspective.

Successful stakeholders in the recycling value chain will need to identify the major cost-drivers in their respective ecosystems (for example, collection, dismantling, sorting, or processing) and how they can effectively be mitigated through, among other factors, technological development, scale, low-cost logistics networks, and partnerships to make a favorable business case for the use of new pools of secondary materials.

The good news is that scaling supplies and, in some regions, rising carbon costs—as well as regulatory tailwinds for product design, transparency, or recycled-content targets (such as the EU Battery Passport, Critical Raw Materials Act, and End of Life Vehicles Directive)—are expected to help make recycled materials more competitive with conventional alternatives.

Although new pools of secondary materials would cost more than primary materials, avoided carbon costs could make up for this.
Image description: Two bar charts show the additional system cost and carbon cost savings ($100/metric ton) for unlocking a new secondary material for eight primary materials: aluminum, plastics, lithium, stainless steel, titanium, copper, magnetic rare-earth elements (REEs), and tantalum. A solid line represents the primary-material baseline of 0%. A dotted line represents the total levelized cost of the secondary material compared to the primary material. The additional system cost bar chart extends above the baseline, while the carbon cost savings bar chart extends below the baseline. From left to right, the dotted line shows whether the secondary material will be less than, equal to, or more expensive than the corresponding primary material. Advanced sorting and advanced recycling will be less expensive compared to aluminum and plastics, respectively. Consumer electronics collection, consumer goods collection, and avoidance of downcycling of production scrap will be about equal with their primary-materials counterpart of lithium, stainless steel, and titanium, respectively. Finally, e-waste collection, magnet dissolution from e-waste, and end-of-life capacitor recycling, will be marginally more expensive than their primary-materials counterparts of copper, magnetic REEs, and tantalum, respectively. Source: Secondary materials models, expert interviews End of image description.

Low-carbon, circular materials are critical to lowering the emissions footprints of complex products. As the momentum behind environmental regulations and public demand for sustainable solutions intensifies, businesses that proactively align with these shifts by embracing low-carbon, circular materials will not only help mitigate climate change but also capture competitive advantages in evolving markets. With respect to the availability and cost of materials, collaboration will be critical to scaling solutions. By highlighting areas in which companies can be most effective in the short term and strategize for the long term, this article series provides a jumping-off point for discussions across value chains.

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