2023-10-17 03:00:32
Will a mineral shortage short-circuit the energy transition? A number of national governments – including the US, Japan, UK and Canada – as well as the European Union and several international organizations such as the World Bank, the International Monetary Fund and the International Energy Agency are currently sounding the alarm. ‘alarm. As’explain the IMF, the goal of net zero emissions by 2050 “will drive unprecedented demand around some of the most strategic metals”, leading to “an explosion in costs” likely “to derail or postpone the energy transition herself “.
Increasingly expressed, this concern is justified: “crucial metals” could indeed become the most important bottleneck in the transition away from fossil fuels. Decarbonization requires a significant increase in equipment and infrastructure, which means an immense need for metals used for the cabling and batteries essential to an electrified future. As I explain in my book The New Map, transforming the way the global economy is fueled will require moving from the world of “Big Oil” to that of “Big Shovels” (the mining giants). In other words, it will take a lot of mining.
The demand for the necessary minerals is already increasing significantly, and the net zero scenario 2050 of the IEA announces that it is expected to more than triple in the next seven years alone. This projection is also optimistic. The proliferation of government programs to accelerate the energy transition is destined to increase demand even further. According to a recent analyse from S&P Global, the very important American Inflation Reduction Act (IRA) will significantly increase already high forecasts.
The race is intensifying around securing supplies and creating new supply chains. General Motors a investi $650 million in a lithium project in Nevada, in order to meet the need for an “established value chain, in support of our ambitions for the next ten years”. Ford holds a stake at a $4.5 billion nickel processing facility in Indonesia. Likewise, Volkswagen and Stellantis are participating in the creation of a new mining company copper and nickel mining in Brazil.
Growing demand will nonetheless remain a considerable challenge, as illustrated by case of copper. A large part of the energy transition concerns electrification, for which copper is essential. The metal has been called “Dr. Copper” for several years, as demand and price trends in traditional markets provide strong signals about overall economic activity and GDP prospects. However, the demand linked to the energy transition no longer only concerns copper, but also metals such as lithium, cobalt and nickel.
State policies around net zero encourage the production of electric vehicles which require on average 2.5 to 3 times more copper than a traditional automobile. Battery storage, offshore and onshore wind installations, and solar panels also require significant quantities of copper. In order to estimate the quantity of additional copper that will be necessary to meet this new demand, S&P Global began by looking at the U.S. and EU climate goals by 2050, and then the agency assessed the technologies needed to accomplish those goals. The conclusion is unequivocal: copper supplies will need to double by the second half of the 2030s.
However, it is very unlikely that this multiplication will be possible, to the extent that commissioning a new mine requires 16 to 20 years, or even more. Across the world, authorization procedures, increasingly constrained by political controversies, are taking longer and longer. Of course, shortages and high prices will encourage recycling, technological innovation and substitution solutions, but these developments themselves will take some time.
Furthermore, copper production is even more concentrated than that of oil. Where three countries – the United States, Saudi Arabia and Russia – produce 40 % of crude oil globally, only two states produce 40% of copper: Peru and Chile. Peru has experienced seven presidents in seven years, and Chile’s populist government is determined to strengthen state intervention as well as increase mining revenues, as illustrated by its plans for nationalisation of the country’s lithium reserves, the most abundant in the world.
The Chilean plan reveals a major obstacle to new investments in mining around the world: what the eminent international economist Raymond Vernon has called ” obsolescing bargain “. The government of a resource-rich state and an international mining company agree on a tax regime to facilitate a multibillion-dollar investment in a new mining project. Years pass, money is invested, and the mine becomes operational. But then a new government comes to power, notices that mineral prices are increasing, and decides to modify the terms of the agreement in order to increase its share of revenue.
This type of instability will lead the company in question to suspend new investments. In the case of pure and simple nationalization, any new investment by the initial company will then by definition be frozen, since this company will no longer be operating. In any case, the planned increase in mining production will not take place. Knowing the upcoming growth in demand linked to the energy transition, as well as the prices that will accompany it, it will be difficult for governments of resource-rich states to resist the temptation to modify the terms of existing agreements. These governments will also set stricter entry requirements for new projects, which will discourage companies (and their boards) from investing in these projects.
There is also another complication: geopolitics. Supply chains for net zero emissions are entangled in the growing rivalry between the United States and its allies, on the one hand, and on the other China, which enjoys a dominant position in mineral processing in metals. Environ two-thirds of the world’s lithium and cobalt are processed in China, like almost half of the world’s copper. The United States, certainly a copper producing country, imports processed copper from China.
Awareness of the dependence of these supply chains on China is leading to alarm bells ringing in the United States and Europe. Governments are now working to “de-risk” mineral supply chains by bypassing China. Hence the launch by the United States of a new Mineral Security Partnership between like-minded consumer and producer countries, as well as the major provisions of the IRA specifically intended to reduce dependencies on China, and to locate the supply chain in the United States electric batteries.
However, this derisking of supply chains will be slow and costly, due to lengthy authorization procedures. If tensions in this area do not yet reach the same heights as the conflict over microchips, this could change. If the Sino-US rivalry intensifies, it will become even more difficult to build new supply chains, leading to an increased risk that crucial minerals become vulnerable to critical shortages.
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