Demand for metals from energy transition could dominate current global supply – Analysis – Eurasia Review
The clean energy transition needed to avoid the worst effects of climate change could trigger unprecedented demand for metals in the decades to come, requiring up to 3 billion tonnes.
A typical electric vehicle battery, for example, requires about 8 kilograms (18 pounds) of lithium, 35 kilograms of nickel, 20 kilograms of manganese, and 14 kilograms of cobalt, while charging stations require substantial amounts of copper. For green energy, solar panels use large amounts of copper, silicon, silver and zinc, while wind turbines require iron ore, copper and aluminum.
Such needs could lead to a surge in demand and prices for metals for many years to come, as we pointed out in a recent Blog based on our research for the October World Economic Outlook and a new one IMF staff document.
Metal prices have already seen strong increases as economies reopen, underscoring a critical need to analyze what might restrict production and delay supply responses. Specifically, we assess whether there are enough mineral and metal deposits to meet the needs for low-carbon technologies and how best to address the factors that could restrict mining investments and metal supplies.
Under the International Energy Agency’s Net-Zero Roadmap to 2050, the share of electricity from renewable energies would drop from current levels of around 10% to 60%, stimulated by solar, wind and hydraulic energy. Fossil fuels would drop from nearly 80 percent to about 20 percent.
Replacing fossil fuels with low-carbon technologies would require an eight-fold increase in renewable energy investments and lead to a sharp increase in demand for metals. However, mine development is a very time-consuming process (often a decade or more) and presents various challenges, both at the corporate and country level.
The first question is to know how far the current production of metals extends and if the existing reserves can ensure the energy transition. Considering the projected increase in metal consumption through 2050 in a net zero scenario, current production rates of graphite, cobalt, vanadium and nickel appear insufficient, showing a gap of more than two-thirds compared to demand. Current supplies of copper, lithium and platinum are also insufficient to meet future needs, with a 30-40% deviation from demand.
We also looked at whether production can be increased by looking at current metal reserves. For some minerals, existing reserves would allow greater production through more investment in extraction, such as graphite and vanadium. For other minerals, current reserves could be a constraint on future demand, in particular for lithium and lead, but also for zinc, silver and silicon.
Most importantly, metal reserves and production are not static. Companies can expand their reserves through innovation in mining technology, and additional exploration efforts can lead to an increase in the future supply of metals to meet future demands.
In addition, recycling metals can also increase supply. Scrap reuse only takes place on a large scale for copper and nickel, but is now increasing for some rarer materials like lithium and cobalt.
A complicating factor is that some large supplies are usually very concentrated. This implies that a few producers will benefit disproportionately from the growing demand. Conversely, it lays bare the risks of energy transition linked to supply bottlenecks if investments in production capacities do not meet demand, or in the event of a potential geopolitical risk within or between producing countries.
The Democratic Republic of the Congo, for example, accounts for about 70 percent of cobalt production and half of the reserves. The role is so dominant that the energy transition could become more difficult if the country cannot expand mining operations. Similar risks apply to China, Chile and South Africa, which are all major producers of some of the metals most critical to the energy transition. Outages or disruptions in their institutions, regulations or policies could complicate supply growth.
A related challenge is the underfunding of investments in metals and mining due to increasing investor attention to environmental, social and governance, or ESG, considerations. Mining has environmental impacts and fuels global warming, although it accounts for only a fraction of coal and gas production, as one pointed out. World Bank report on the mineral intensity of the energy transition.
Reduced access to finance by lower-rated companies could restrict production, adding another potential bottleneck to the supply chain. In response, the miners try to reduce their carbon footprint. A S&P Global Analysis shows that the average ESG score of the S&P Global 1200, an index representing about 70 percent of global market capitalization, stood at 62 out of 100, while the metals and mining sector’s score rose to 52 last year from 39 in 2018. This may indicate that miners are catching up with other sectors to become more attractive to global investors looking to build more responsible portfolios.
Commitment to better environmental scores could help unlock more green finance for mining companies. This is corroborated by our analysis of S&P 1200 companies, which shows that mining companies that raised their ESG ratings from 2018 to 2020 also saw their debt and equity financing increase. More generally, the effort to unlock more green finance is also supported by global efforts, among others, of the World Bank Climate-smart mining initiative and IMF support for greening the recovery and promotion green finance.
The world needs more low-carbon energy technologies to keep temperatures from rising more than 1.5 degrees Celsius, and the transition could trigger unprecedented demand for metals. Although deposits are largely sufficient, the necessary acceleration of investment and mining operations could be difficult for some metals and could be hampered by specific market or country risks.
This article benefited from comments from Andrea Pescatori.
* About the authors:
- Nico valckx is currently a Senior Economist in the IMF’s Research Department, specializing in energy markets and climate risk.
- Martin stuermer is an economist in the Commodities Unit of the IMF’s Research Department. His research interests are macroeconomics with a focus on energy, raw materials and energy transition. He has among others publications in Macroeconomic dynamics,Journal of International Money and Finance and Energy saving.
- Dulani Seneviratne is a financial sector expert in the IMF’s Monetary and Capital Markets Department. In her current role, she participates in climate policy and strategy work related to the financial sector in addition to bilateral surveillance work related to the Financial Sector Assessment Program for Turkey, with a focus on systemic risks.
- Ananthakrishnan Prasad is Deputy Head of Division in the Middle East and Central Asia (MCD) Department of the International Monetary Fund (IMF) and Head of Mission for Kuwait and Oman. He holds a doctorate from the University of Bombay, India; MBA in Finance from the University of Pittsburgh, USA; and Masters of Commerce from the University of Bombay, India.
Source: This article was published by IMF Blog