No Metals Means No Transition
Fisk, Tom. “Birds Eye View of Mine.” Pixels.com, www.pexels.com/photo/bird-s-eye-view-of-heavy-equipment-2101140/.
The imperative of a transition away from fossil fuels, towards climate-friendly energy sources is becoming clearer by the year. The natural disasters caused by climate change can ultimately be traced back to the abundance of CO2 we put into the atmosphere. Naturally, nations across the globe have responded by pledging to accelerate efforts to reduce CO2 emissions. The global community arrived at the consensus that 2050 is a benchmark year for complete energy transition efforts.
Climate Change Outlook
As identified by the nations present at last year's UN Climate Change Conference (COP26), the world aims to limit global warming to 1.5 degrees C by 2050. However, based on the pledges made by these nations at COP 26, we will, in fact, have only limited global warming to 2.5-2.7 degrees C by 2050 (International Energy Agency). The ambitious goal of a 1.5 degrees world, would require more pledges and an achievement of net-zero (zero carbon emissions) by 2050. In order to do so, the world would have to reduce carbon emissions by 25 billion tons of CO2. The pillars of the pathway that lies ahead then, include increase in renewable energy, predominantly wind and solar, increased production of electric vehicles (EVs), and increased carbon-capture and green hydrogen infrastructure, those being a means of carbon removal, and an alternative for oil and gas as an energy source, respectively.
Essentially, we have to electrify the world. For that, we need metals, and a lot of them. Metals are critical to all parts of the energy transition, from the lithium and cobalt in the batteries that power EVs, to the copper and aluminum that make up electrical wires, all the way to rare earth metals like neodymium and dysprosium that are vital to the infrastructure of solar panels and wind turbines. Furthermore, steel will be the backbone for the infrastructure of many of these energy transition technologies, only heightening the need for metals. Specifically, there are five to six core energy transition metals (ETM), them being lithium, cobalt, copper, aluminum, nickel, and rare earths. These metals are essential to the production of net-zero-supporting technologies.
ETM Supply and Demand Issues
When looking at projected future demand for ETM metals, a steep climb in supply is needed to match it. In order to reach net-zero goals, global wind and solar capacity would have to more than double by 2050. The challenge this imposes on ETM supply is compounded by the fact that renewable energy is much more ETM intensive than the current primary source of energy in gas/coal power plants. For example, a thermal power plant requires 2.5 tons of copper for every MW of energy output, while a wind farm or solar array would require 10-15 tons of copper. Then, with respect to electrifying transportation, EVs would have to increase their market share to 60% by 2030 in order to stay on track with long-run net-zero goals. In 2021 alone, 6.5 million EVs were made. By 2030, 85 million EVs must be manufactured, globally (Wood Mackenzie). These figures not only necessitate a hike in supply, but when expressed within the context of ETM demand outpacing supply, imply a supply gap.
To understand why such a supply gap will arise, projected to begin in 2024/2025, it is important to establish some core mining operations concepts. One such concept is that as metals from a mine are extracted, the reserve base of that mine depletes. This means that overtime, the rate at which metal can be extracted from a mine decreases, leading to a slowdown in the overall metal supply. Additionally, increasingly lower grades of metals will be mined overtime, meaning that a lower concentration of the metal will be mined over time. Any kind of mining will always present a constant problem of decreasing supply. So, when taken into account the ETM demand growth forecasted for the coming decades, it is easy to understand how the lagging supply expressed as a percentage of the demand expected produces supply gaps for the ETMs. The supply gap can be seen to represent an opportunity for mining companies to ramp up operations and invest in new projects to match this future demand. However, this solution is not as straightforward as it appears due to financial, geopolitical, and legislative impediments that complicate the outlook for mining going forward.
Shareholder Blockades of ETM Mining Investment
Arguably the most significant challenge to meeting future ETM demand is encouraging investment for new projects. Without the funds to finance these projects, there will be no energy transition. According to ETM supply gaps, $350 billion worth of investment will need to be poured into the mining industry to increase supply. Discussion on where these investments will come from faces headwinds driven by shareholder attitudes. An increase in production will often be incentivized by high selling prices, as these allow for higher margins, or opportunities to make more of a profit. However, these high prices are exactly what will make it difficult for consumers to buy the raw materials. For example, if a battery manufacturer needs to meet the demand for the increase in batteries due to the increase in demand for electric cars, it needs to manufacture these batteries at a reasonable cost to allow consumers down the value chain to be able to afford the electric vehicle.Thus, the manufacturer will only be willing to buy the raw metals at a certain low cost. The low cost desired by the manufacturer is not shared by the mining firms, as in order to ramp up production, they must invest in new, higher-risk projects. This is where shareholder reluctance comes into play. Despite the opportunity for a higher risk to reap a higher reward, shareholders and investors that influence mining company’s investment decisions, prefer to make more secure, low-risk investments to receive their payout, or dividend sooner rather than later. Shareholder reluctance is problematic as it essentially stagnates the energy transition process, since these higher risk investment decisions will be necessary going forward. Specifically, many of these higher risk decisions have to do with environmental, social, and governmental (ESG) factors.
ESG Complications in ETM Production
The ETM supply outlook is further complicated by a host of environmental, social, and governmental (ESG) factors. This comes as a result of the geographical locations that mining projects will have to be conducted in. Many mineral-rich nations, such as Chile, China, and the Democratic Republic of the Congo (DRC), happen to pose such issues.
The environmental risks of mining are most apparent in Chile and China. Chile has the largest lithium reserves in the world and China controls 60% of the world's lithium refining processes. The primary means of mining lithium is by brine or mineral sources, the former being more closely associated with raw lithium mining in Chile, while the latter is associated with refining in China. Lithium mining from brine sources involves the use of immense amounts of water to pump the lithium embedded in ground, up into the eventual pools of lithium that form. The sun then works to evaporate the water, leaving the lithium behind (Bloomberg). The high water usage inherent to brine sourcing is problematic; because most lithium production occurs in the water-deficient areas of Chile (such as the salt flats of Chile’s Atacama desert), high water usage is difficult.
China, on the other hand, poses the issue of high emissions intensity- the very problem that an increase in metals production would work to mitigate. This is because most of China’s refineries are powered by coal, making them highly emissions intensive. When compared with brine, the process of refining lithium mineral concentrate is 3.5 times more CO2 intensive (Wood Mackenzie). Given the challenges of both forms of lithium production, investors are faced with increasingly difficult investment decisions as complying with environmentally friendly principles factors into their investments that will shape the energy transition.
Social and governmental roadblocks pose issues in a country like the DRC. The Congo controls 70% of the world's cobalt, and as mentioned earlier, will need to increase its production of the mineral to meet energy transition goals. However, artisanal, or illegally run, make-shift mines have become increasingly prevalent. Here, cobalt is often mined using child labor. Chinese buyers often control these artisanal mines and sell the cobalt to Chinese companies, via the black-market, to be refined in China. Of the cobalt produced in the DRC, 25% goes through the black-market (France 24). This makes for a murkier mining landscape, making it harder to rely on the security of rules and regulations to guide the mining sector in the Congo. The risk of cobalt mining in the Congo is further heightened by the political instability in Eastern Congo due to an ongoing war waged by Congolese militant groups. The financing of these militant groups comes from their ability to take over and control cobalt mines and cobalt rich-regions. This regional instability heightens the risk of investment in DRC cobalt projects.
Overall, there are many lenses through which obstacles to the energy transition can be seen. Financing the increase in metal production will require difficult investment decisions and a willingness to make high risk investments. These decisions are made more complex by ESG concerns. Nonetheless, an increase in ETM will be vital to meeting energy transition needs and satisfying net-zero pledges. Going forward, the responsibility of facilitating the transition will rest on the shoulders of the mining industry, as no metals means no transition.
Bloomberg. “Here's Where the Juice That Powers Batteries Comes From.” YouTube, YouTube, 6 Jan. 2017, www.youtube.com/watch?v=50rXYrFCQMw&t=300s.
“Energycents - EP 99: Metals and Mining: Fulfilling the Promises of Cleantech.” SoundCloud, soundcloud.com/ihsmarkitenergysolutions/energycents-ep-99-metals-and-mining-fulfilling-the-promises-of-cleantech?in=ihsmarkitenergysolutions%2Fsets%2Fenergycents.
france24english. “Inside the Murky Business of Cobalt Mining in DR Congo.” YouTube, YouTube, 20 Feb. 2018, www.youtube.com/watch?v=ll7aUgeK3-o.
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“The Raw-Materials Challenge: How the Metals and Mining Sector Will Be at the Core of Enabling the Energy Transition.” McKinsey & Company, McKinsey & Company, 5 Aug. 2022, www.mckinsey.com/industries/metals-and-mining/our-insights/the-raw-materials-challenge-how-the-metals-and-mining-sector-will-be-at-the-core-of-enabling-the-energy-transition.
“McInroy & Wood Talk with Julian Kettle ‘the Energy Transition Starts and Finishes with Metals.’” YouTube, YouTube, 23 June 2022, www.youtube.com/watch?v=XiASfeeGfV8.