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Could constrained metals supply delay energy transition?


10-15 years for establishing mines means more supplies in late 2030s

Expected drop-off in lithium grades by 2030 requires innovation

Turbulent recent years break link between commodity prices, capex

  • Author
  • Ekaterina Bouckley
  • Editor
  • Bill Montgomery
  • Commodity
  • Coal Natural Gas Metals
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  • Lithium copper Nickel United States

Demand for the critical metals associated with Net Zero 2050 strategies looks assured, but there is a growing sense that supply constraints are going to derail or delay the energy transition unless several significant barriers are soon overcome.

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The first constraint is time needed to establish more facilities such as mines.

"If we think about manufacturing [facilities], this varies geographically," Nick Pickens, global mining research director at Wood Mackenzie, said. "In Europe it can take nine-10 years to build a gigafactory. The mining industry takes even longer to turn out mines."

Pickens, like others in this article, spoke at the the 1st Critical Metals and Minerals Conference in London March 22-23.

It depends on the commodity, but on average, 10 to 15 years go by between the exploration and ramp-up stages. Plus, permitting procedures and the scrutiny around environmental, social and governance criteria have become extremely lengthy, slowing the energy transition, speakers at the conference said.

Grade decline fixes

When it comes to engineering, there are a multitude of challenges to overcome too -- primarily the issue of declining ore grades that prove challenging for operating costs and environmental performance.

"Copper grades, at 2% in 1900, dropped to 1% at the turn of this century and now stand at 0.7% for major operations," said Jack Bedder, founder and director of Project Blue, a UK consulting firm. "Lithium is soon to go a similar way. Grades for new mines coming into production are similar to existing assets, but towards the end of the decade we'll start to see them drop off."

He said only new technologies can help offset that.

Link between prices, capital broken

The second challenge is the persistent lack of investment. A strong link between prices of future-facing commodities and the capital spent in their growth has somewhat broken down.

"We have gone through a period of high prices but are not really seeing the capital investment responding to that," Pickens said.

In his opinion, this is due to the 2015-16 period of weak commodity prices and the time it took mining companies to get their balance sheets in order, and to provide returns to shareholders as soon as their operations were profitable again.

Although commodity prices have come back since, Bedder noted, the last few years, although advantageous from a price perspective, were still disconcerting for capital because of intensified trade wars between the US and China, the global pandemic, the Russia-Ukraine war, soaring inflation, the property crash in China and deteriorated global economic growth. None of these turbulent events was conducive for investment, he said, adding that with the energy transition in mind, the stakes now appear higher, but the ever-pressing need to decarbonize emerges as a new barrier to investment in future supply.

The allocation of capital within the mining industry is shifting from providing volumes for the energy transition to allocating resources to carbon abatement, Pickens said. In some aspects, decarbonization is happening in the wrong place, he added.

"If we start to build in carbon price and carbon taxation, for most of the major mining companies heavily exposed to iron ore, steel and coal markets, it makes more sense to them to be investing in abating that production and making those operations more profitable than investing in growth in new energy metals," Pickens said.

Investment coming from new areas

Another part of the problem is that the mining industry's capability to invest in growth is seen as no longer enough, and the industry is already broadening its investor base.

"We need investment to come from areas not seen before in the mining industry," Pickens said.

Several players unusual for the sector have already come to the fore, including original equipment manufacturers and trading houses, he added.

Forecasts of looming supply shortages of critical metals relative to their future demand and the anticipation of a scramble for input materials is prompting metals OEMs to look upstream, according to Charles Douglas-Hamilton, technical director at Optiva Resources, a UK company with exploration projects in Guinea, West Africa.

"If I were an OEM, I'd like to buy into best-in-class ESG-focused mining operation, knowing this investment could be cheaper than long-term contracts and also gives you control over everything that's done on the mine site," Douglas-Hamilton said.

The new trend is showcased in automaker Volkswagen's announcement that it will invest in mining battery minerals, as reported by Reuters March 17, can somewhat ease the capital shortage the industry. It will probably not be a surprise if further investments in metals next come from the oil and natural gas sector, given the size of their balance sheets, Pickens said.

Recycling can only partly mend the expected demand-supply disparity. But it could only contribute on a mass scale after the world reaches peak consumption levels for batteries and EVs, which is still 10-20 years away, conference speakers agreed.

Attention to downstream outweighs mining priorities

As for industrial strategies aimed at bolstering critical minerals supply forged by the EU, the US, the UK and some other nations, they focus very much on downstream elements. This makes sense in certain markets. For instance, in rare earths, a lot of the pricing comes from technology and knowledge. But for the likes of copper and nickel, with a big slice of the cost upstream, the lack of investment in mining will push up prices and make the energy transition and further EV penetration less affordable, the speakers said.

"From a government policy perspective, it has to be an understanding that they need to focus on the whole supply chain end to end," said Joseph Mansour, a critical minerals lead at the UK Department for Energy Security and Net Zero.

"There is no point focusing on the extraction if you then have not got processing capabilities," Mansour said. "And the inverse is also true -- building processing capacity if you have not got the raw materials to fill it is again a vulnerability."