2023-09-22 21:02:40
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 (IEA) are currently pulling the alarm bell. As the IMF explains, the goal of net zero emissions by 2050 “will drive unprecedented demand around some of the most strategic metals”, leading to “a cost explosion” likely “to derail or to postpone the energy transition itself.”
Increasingly expressed, this concern is justified: “crucial metals” might 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.” mining). In other words, it will take a lot of mining.
Demand for needed minerals is already growing significantly, and the IEA’s 2050 net zero scenario predicts it will 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 analysis by S&P Global, the very important American Inflation Reduction Act (IRA) will significantly increase already high forecasts.
Considerable challenge
The race is intensifying around securing supplies and creating new supply chains. General Motors has invested $650 million in a lithium project in Nevada, to meet the need for an “established value chain, in support of our ambitions for the next ten years”. Ford has a stake in a $4.5 billion nickel processing facility in Indonesia. Similarly, Volkswagen and Stellantis are participating in the creation of a new copper and nickel mining company in Brazil.
Growing demand will nonetheless remain a considerable challenge, as the case of copper illustrates. 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 regarding 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. To estimate how much additional copper will be needed to meet this new demand, S&P Global first looked at the US and EU climate goals for 2050, then the agency evaluated the technologies necessary to achieve these objectives. The conclusion is unequivocal: copper supplies will have 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 the world’s crude oil, only two states produce 40% of the copper: Peru and Chile. Peru has had 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 to nationalize 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 an “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 change 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.
Risk mitigation
There is also another complication: geopolitics. Supply chains aimed at net zero emissions are entangled in the growing rivalry between the United States and its allies on the one hand, and China, which enjoys a dominant position in the processing of minerals into metals. Around two thirds of the world’s lithium and cobalt are processed in China, as are 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 United States’ launch of a new mineral security partnership between like-minded consuming and producing countries, as well as the major provisions of the IRA specifically aimed at reducing dependencies on -vis China, and to install the supply chain of electric batteries in the United States.
However, this effort to mitigate supply chain risks 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 might 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.
: Project Syndicate, 2023.
Translation Martin Morel
Pair Daniel YERGIN
Energy historian and vice president of S&P Global. Latest work: “The New Map: Energy, Climate and the Clash of Nations” (Penguin, 2021).
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 Monetary Fund international and the International Energy Agency (IEA) are currently drawing…
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