Resource Revolution and a Green Paradox?
Mark Smith, Co-manager, TB Amati Strategic Metals Fund
An energy system powered by clean energy technologies needs significantly more minerals, notably:
Lithium, nickel, cobalt, manganese and anode graphite for batteries
Rare earth elements (mainly heavy REEs) for wind turbines and electric vehicles motors
Copper, silicon and silver for solar PV
Copper and aluminium for electricity networks
There is no shortage of mineral resources, but recent price rises for cobalt, copper, lithium and nickel highlight how supply could struggle to keep pace with the world’s climate ambitions.
An analysis of the projected share of clean energy technologies in total demand for selected minerals in a sustainable development scenario (1.5°C) – shows the above-mentioned metals could benefit strongly.
Mineral demand for clean energy technologies by scenario
Source: International Energy Agency
In the short term the supply-demand picture for the base metals and specialty metals is well matched, however if you project the committed mine production against primary metal demand an emerging deficit presents itself in the medium term.
Either the global climate ambitions will have to be tapered or we will have to adjust to an inflationary commodity environment under a sustainable development scenario (wrt climate change).
Supply and demand projections (under a sustainable development scenario)
Source: International Energy Agency
Put another way? The energy transition starts and ends with (strategic) metals and a primary supply response needs significant capital investment both for exploration and mine development.
According to Wood Mackenzie the challenge of scaling up primary base supply is massive:
Base case 2.5°C pathway = US$0.5 trillion capital investment over next 20yrs
Accelerated energy transition; net zero by 2050 and limits 1.5°C temperature rise = US$2.0 trillion over next 15 yrs
Source: Wood Mackenzie
ETO= Wood Mackenzie's Energy transition outlook scenario (1.5°C pathway)
A 5 X increase in base metal supply is needed by 2040. Worse case without significant scrap recycling:
11.3Mt aluminium deficit
19Mt copper deficit
3.5Mt zinc deficit
2.6Mt nickel deficit
2.2Mt lead deficit
Battery metals 7x to 42x current demand/supply???
Is the mining industry prepared? NO!
During the last ‘mining boom’ investors encouraged miners to grow at any cost, growth over margin was the investors choice. This led to over geared balance sheets and a peak (2012) in development capital to bring new mines on line. The metals cycle changed and mines closed, and the development capital shrunk. We entered a 10 year period of debt restructuring and financial discipline. In reality the industry should have been doing the opposite to prepare for this new metal demand wave.
Annual development capital has more than halved ($130bn to $60bn) and exploration expenditure over the same period fell from a peak of $21bn in 2012 to $8.7bn in 2020. With the lead time of 7-10 years to bring a new mine on stream, we could witness significant pinch points post 2025/2027.
Investors should now be demanding production and development growth NOT dividend yield, as our industry is entering a phase of ex growth, declining reserve life and lower mineral grades.
The next decade should be very interesting for the resource investor from a capital growth of mining investments and an aggressive M&A cycle as the majors mop up the mid-caps to maintain a growth profile.
Global (non-precious metal capital expenditure US$bn)
Source: Scotia Bank
Resource nationalism inevitable?
An evolving clean energy transition calls for an evolving approach to energy security; policy makers must expand their horizons and act to reduce the risks of price volatility and supply disruptions.
Production and processing of many minerals such as lithium, cobalt and some rare earth elements are geographically concentrated, with the top three producers accounting for more than 75% of global supplies.
Supply chain concentration (and control)
Source: International Energy Agency
Ironically, China is the largest single emitter of greenhouse gases, yet controls the majority of minerals and processing facilities to produce metals and chemicals key for the western world to decarbonize its energy supply. There lies the problem!
In summary:
1. The mining industry is not currently prepared to respond to the green ambitions of politicians.
2. Renewable energy technology will have to improve/adapt to thrift out some key metals to ensure a sustainable supply-demand balance.
3. Metal demand for decarbonisation will have to take precedent over other discretionary demand sectors
4. Policy makers globally (ex-China) will have to act quicker to ensure the extraction and processing of key metals are permitted outside China within the next 7-10yrs.
5. And we haven’t even addressed the role uranium will play in the green energy transition…
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