The Energy Transition Has A Major Metal Problem

The metals mining industry is at a crossroads. Key energy transition metals need trillions of U.S. dollars in investment if the world has any chance of advancing the transition to meet the Paris Agreement targets. At the same time, investors are backing out of carbon-intensive sectors, which metals mining undoubtedly is. Moreover, governments in developed nations with net-zero goals—including the U.S. Administration—want only “sustainable” new domestic mining to extract the minerals critical to support increased transportation electrification and renewable power generation aligned with their net-zero by 2050 targets. Currently, demand for key battery metals, including lithium, graphite, cobalt, nickel, copper, manganese, and aluminum, is soaring, but supply is struggling to catch up.

Supply comes from mining—a very carbon-intensive industry—but policymakers and investors need to acknowledge that there is one dirty industry at the beginning of the clean energy supply chain. Until other forms of totally clean energy become available—if ever—metals and metal mining will power the energy transition.

Here’s where the dilemma for investors lies—they want Paris-aligned portfolios and have been reluctant to support a large carbon emitter like the metal mining industry. Yet, this industry needs support—including from bankers and investors—to raise capital to invest in new supplies of lithium and copper that will power the electric cars of environment-conscious investors.

Analysts, investors, and some of the biggest miners say that the mining business needs to change, as does the dialogue between investors and mining companies, and policymakers and miners, if supply is to catch up with demand and not stall the energy transition because of a lack of key metals.

Business Environment Needs To Encourage Higher Investments

“Obtaining adequate supplies of these vital transition resources will be severely hampered unless the mining business environment becomes more conducive to higher levels of investment,” Graham Kellas, Senior Vice President, Global Fiscal Research, and William Tankard, Principal Analyst, Copper Mine Costs, at Wood Mackenzie say.

“Ultimately, success relies on governments and investors agreeing clear, predictable, stable, progressive terms and then sticking to them,” Kellas and Tankard noted. '

This vision could be overly optimistic, considering the lengthy and sometimes unproductive discussions about fiscal regimes between producers of those resources and governments holding the resources, WoodMac’s analysts say.

“But if the world is to have any hope of achieving COP26 goals, some energy transition fantasies must become reality,” they conclude.

U.S. Backs Domestic Battery Metals Mining

Major developed economies are backing their metal mining industries to counter the Chinese dominance in key energy transition materials. Russia’s war in Ukraine has also led to concerns about a resource crunch in several key metals markets, including nickel and aluminum, considering that Russia is a major global supplier of both.

U.S. President Joe Biden included last month strategic and critical materials necessary for the clean energy transition—such as lithium, nickel, cobalt, graphite, and manganese for large-capacity batteries—in the Defense Production Act of 1950.

“The United States shall, to the extent consistent with the promotion of the national defense, secure the supply of such materials through environmentally responsible domestic mining and processing; recycling and reuse; and recovery from unconventional and secondary sources, such as mine waste,” President Biden said in a memo to the Secretary of Defense.

The United States has acknowledged the need to move faster in securing key minerals domestically and from allies such as Australia; otherwise, America’s clean energy goals and hi-tech and automotive supply chains could depend on China.

Commenting on the Presidential action, Rich Nolan, President and CEO of the National Mining Association, said:

“We have abundant mineral resources here. What we need is policy to ensure we can produce them and build the secure, reliable supply chains we know we must have.”

Demand for those minerals in the United States and globally is soaring, and even a possible economic slowdown will not significantly derail that demand.

Even if a recession were to materialize in parts of the world—due to rampant inflation, Russia’s war in Ukraine, and rising interest rates—this would not give battery metals producers breathing space to bring on necessary supply in a timely manner, Julian Kettle, Senior Vice President, Vice Chair Metals and Mining, at Wood Mackenzie, said this week.

“Recessions are short-lived and, while demand can decline markedly, recovery can be quick, with absolute demand back to ‘normal’ in one to two years,” Kettle says.

Supply shortages could actually grow because of more problems in getting investment during an economic slowdown, he argues.

Investment Not Enough

Investment as-is, without a recession, is insufficient to meet demand to the extent to help the world reach the Paris Agreement goals, the world’s biggest miner, BHP, and the top asset manager in the UK, Legal & General Investment Management (LGIM), said in a report earlier this month.

“The energy transition will not happen without a massive increase in the supply of metals,” the report notes, adding that a “radical change to the world’s energy and land use systems is required: time is short and current rates of investment are insufficient to bring about the required change.”

Considering that the extraction of minerals is an emission-intensive process, investors have two key roles to play, according to the report: “engage constructively with the sector to help drive down operational emissions” and “help mobilise the capital that will be required to ensure affordable metal supply does not impede the race to Paris.”

By Tsvetana Paraskova for Oilprice.com