Digging into the numbers – will the price and supply of raw materials hinder the renewable energy revolution?
Walking past an Extinction Rebellion protest a couple of weeks ago, one of the big and bold posters being marched around caught my eye. It read “Sun and Wind. Same prices as last week. Invest now”. While I agree with the “invest now” bit, I disagree with the “same prices as last week” part of an otherwise solid proposition.
Whilst the sun and wind are free, there is clearly a financial, as well as an environmental cost to produce the technologies that use the weather to generate energy. Aside from the costs of construction, operation and capital, the materials used in the construction of these technologies have a major impact on the cost of renewables. The close link between mining and renewable energy is often overlooked, but the energy transition is highly reliant on the price and availability of certain metals and minerals.
It is important to consider the impact these raw materials can have on the costs of green technology, as well as the significance of reducing the carbon footprint of the mining industry to ensure the energy transition is truly green. The growing demand for these minerals and metals, partly attributable to both the green energy transition and the growth in demand for electric vehicles, is in many cases, currently exceeding supply. This has led to volatile and increasing prices of the key materials for renewables, including but not limited to; lithium, copper, nickel, manganese, cobalt, as well as some of the rare-earth metals. For example, the prices of battery-grade lithium carbonate in China have jumped to a record high of 261,500 yuan ($41,060) per tonne this year, which was more than five times higher than in January 2021 and the cobalt price has doubled to $70,208 a tonne since last January, whilst nickel has ‘only’ increased by 15% to $20,045 a tonne (MINING.COM).
These cost fluctuations will likely lead to substitutions in metals as well as technology in the energy transition. This is already evident with the reduction in the use of cobalt and the increase in the use of nickel in batteries, because of relative differences in pricing. We think this increase in material diversity will continue because there are multiple competing metals for making a battery. It is likely that we will end up with a plethora of battery types because there isn’t enough nickel, cobalt, magnesium, zinc, or platinum for any one metal to hold a monopoly in the market for long. For example, to achieve net zero by 2050, 100% of global nickel resources (89 Mt) and 160% of inferred nickel resources (120 Mt) would be required (Precious Metals Commodity Management LLC). Whilst there are large known resources of lithium in the world (both pegmatites/hard rock and brine type deposits), they still need to be efficiently mined by somebody somewhere and the nationalisation of lithium resources in many Central/South American countries has been less than helpful when it comes to increasing investment and supply.
On a more positive note, there is evidence that markets are reacting by increasing supply, and lithium mines produced an estimated global total of 100,000 metric tons of lithium in 2021 compared to just 28,100 metric tons in 2010, according to data released by the US Geological Survey.
We see the same market forces playing out in the copper market. Copper is the second most conductive metal/mineral after silver, making it pretty much irreplaceable when it comes to renewables. According to the International Energy Agency, producing 1 MW of onshore wind or solar each require 2-3 times more copper than producing 1 MW of energy from a coal power fire station and when it comes to offshore wind, 1 MW requires 5-8 times more copper than coal due to the extra subsea cables required. This translates to around 8-10 tons of copper per MW of offshore wind generation capacity. In addition to copper’s critical role in renewables, electrical vehicles can contain up to a mile of copper wiring inside the stator to convert electric energy into mechanical energy. This is a big issue for the industry as the project pipeline for copper extraction projects is the slimmest it has been for the past 20 years, even though copper demand is at an all-time high and is forecast to increase phenomenally over the next ten years.
Interestingly, this hasn’t had quite such a dramatic effect on copper prices yet and although these are now at an all-time high of $10,000 per ton, it is not much higher than the price in 2011 and it has touched some quite dramatic lows in the intervening period. This price volatility has discouraged investment and most major copper mining companies have focused on giving dividends back to investors rather than on more exploration or project development over the past decade. There isn’t a quick fix for this. Whilst it used to only take 2-3 years to get a copper mine developed from the moment a deposit is discovered, it now takes 8-12 years due to increased complexities from permitting. It’s possible there will be a small surplus in the next few years, as a couple of large new copper mines will be coming online in the next six months. However, beyond that the emergence of a structural deficit in copper seems inevitable, despite approximately 800 Mt of global reserves and 1,200 Mt of inferred copper resources (figures from Precious Metals Commodity Management LLC).
The hydrogen decarbonisation routes are facing a similar situation as the key metals for the hydrogen economy are platinum, ruthenium, and iridium. Whilst there is an abundance of known reserves of all three mentioned metals, the current rate of mining them will not come close to meeting the predicted demand. Both the iridium and ruthenium markets are in structural deficit due to limited above ground stocks. Iridium will likely limit the scalability of proton exchange membrane (PEM) electrolysers, with alternative technologies (Alkaline, SOFCs, DMFCs) probably taking a larger share of the market in the future.
As we are seeing already, deficits in the availability of key metals have led to even higher commodity prices with a knock-on impact on construction costs, further reducing renewable energy margins. This has been partly offset by the higher prices being paid for electricity as a result of the war in Ukraine, but we think the former (higher materials costs) will last a lot longer than the latter.
Thankfully, the inexorable laws of supply and demand mean that markets tend to react to pricing signals and the subsequent improved mining business cases will make more deposits economically viable, eventually increasing supply and decreasing prices. This should allow the energy transition to continue as planned (and with better margins for generators). For the metals and minerals where there truly aren’t enough reserves/resources or if the prices get too high, there will inevitably be material and technological substitution.
What is less clear is how long these long-term reactions will take and what actions can be undertaken in the interim. In key metal producing countries around the world, favourable permitting and fiscal regimes (tax and royalties) for mining will be key to growing supply. Mining companies must also ensure their activities are as environmentally and socially beneficial as possible, both because it is essential to ensure the energy transition is truly green and sustainable and to meet increasingly strict environmental, social, and governance (ESG) investment criteria. In countries investing in renewable energy, grants and tax allowances for technology innovation as well as higher carbon taxes could also have an impact.
In conclusion, the revolution in renewable energy generation coupled with the explosive growth in the number of electric vehicles has predictably played a role in increasing the price of the raw materials used in these technologies. It is unclear what impact this will have on the long-term roll-out of renewables as markets will inevitably react either by opening new mines to increase supply or by substituting metals and technologies. That said, these are long term reactions whereas current shortages and eye watering price rises in commodities such as lithium are short-term effects. We are acutely conscious that it is all too easy for commentators like us to stand by and glibly say, “the markets will correct eventually”, but there is a risk that the energy revolution that has picked up so much momentum in the last decade could be hindered in the meantime. More imaginative solutions and favourable government policies for both mining and renewable energy are needed globally in the coming years to ensure the required speed of the energy transition is actualised.