Building stronger battery raw materials supply chains for energy transition
As the CEO of an international mining business with assets producing multiple metals of value to global energy transition, Eurasian Resources Group’s Benedikt Sobotka shares wide-ranging views with Andrea Hotter on the evolution of the supply chains needed to meet demand
The energy transition is creating “the biggest purchase order in history” for raw materials like copper, cobalt, lithium and nickel, according to the chief executive officer of Eurasian Resources Group (ERG). It will mark a huge shift in the global economy, require significant investment, and pressure supply chains, leading to higher prices and shortages of critical minerals, Benedikt Sobotka told Metal Market Magazine.
“The energy transition is probably the biggest fundamental change of an economic system in history, similar only to the introduction of the internal combustion engine or the second industrial revolution. It’s the biggest purchase order in history for raw materials other than carbon-based commodities,” he said.
Sobotka said that achieving the 2015 Paris Agreement target of limiting the global mean
temperature increase to 1.5°C above pre-industrial levels will require investment of between $750 billion and $1.5 trillion every year for the next 30 years, based on analyst assessments.
“That’s a $50 trillion investment requirement across the world. A lot of that money has to go into places where there’s currently not enough investment due to a very big social and geopolitical divide,” he added.
Roughly 1% of the global population generates 16-20% of world carbon dioxide (CO2)
emissions. That means 99% of the world’s people generate about 80% of its CO2, translating into a huge imbalance in who actually creates the problem, who now needs to solve the problem, and who will suffer from the problem, Sobotka said.
“We haven’t yet understood how fundamental this transition will need to be, and it’s going to cost a lot of money. But this also translates into great opportunities for those that produce in the supply chain and provide technological solutions, as well as for making the world more efficient and more circular,” he added.
We expect many countries to be on a 50% EV transition penetration rate within the next 20 years
ERG is a diversified miner with a portfolio including copper, cobalt, aluminium, iron ore, ferro-chrome and other ferroalloys. It also has an energy division as well as a logistics arm.
Push-pull driving change
There are two dimensions driving the energy transition – the pull from the consumer, and the push from the regulator, Sobotka said.
He added that the consumer aspect is particularly evident in transportation, which accounts for 30-40% of global CO2 emissions, in the form of a move away from the internal combustion engine (ICE) to electric vehicles.
Sobotka noted that electric vehicle sales had beaten all expectations, doubling between 2020 and 2021 to 6.6 million vehicles. Despite semi-conductor shortages, he forecasts sales of 2.5 million electric vehicles in the first two months of 2022, with total annual sales of 8-9 million this year.
It is, he said, an unstoppable trend.
“Based on the current market share of new electric vehicles in total automotive sales, we expect many countries to be on a 50% electric vehicle transition penetration rate within the next 20 years. That’s a fundamental change in the way we consume energy and petroleum products, and a fundamental shift in the infrastructure that will have to be built for charging – and it requires enormous amounts of raw materials that today are not produced,” he added.
But it does not come without challenges, namely that most of those raw materials will end up in the supply chain and be stuck there for many years until the product reaches its end of life, Sobotka said.
“We initially won’t see much recycling, so all these products need to be produced fresh,” he added.
This will put a massive strain on the battery raw materials and energy transition supply chain, he noted, with shortages expected and higher prices likely. According to the International Energy Agency, mineral requirements will need to be quadrupled to create clean energy technologies and meet the Paris Agreement goals by 2040.
“We see that already in 2021, lithium prices are up almost sixfold; cobalt prices are up 120% and will rise further; copper prices are very healthy despite a weak construction
sector; and the nickel price has exploded. This is being driven by the energy transition and it’s not going to go away because we’ll need significant amounts of material,” Sobotka said.
ERG is active in several of these key energy transition markets. It mines copper and cobalt at Frontier, Boss Mining and Comide in the Democratic Republic of Congo, and also owns Metalkol Roan Tailings Reclamation (RTR), a tailings reprocessing operation and hydro-metallurgical facility in the DRC that aims to produce enough cobalt to power more than three million electric vehicles per year.
The company also operates copper and cobalt metal producer Chambishi Metals in Kitwe,
Zambia, the country’s only cobalt metal plant and one of the largest worldwide.
Sobotka also noted a somewhat aggressive regulatory approach to make the sector carbon neutral.
“Many countries have banned ICE sales after a certain date; the auto sector is about 10% of gross domestic product in developed countries, and to fundamentally change it by order of government has never happened before. But it’s happening and it’s irreversible,” he added.
Changing the energy mix to use more renewables like wind and solar will also require significantly higher amounts of raw materials, including copper and aluminium as well as cobalt and other battery raw materials for use in grid storage.
If you push a supply chain too hard, you get environmental, social and governance (ESG) compliance problems
Cobalt demand, for example, is expected to grow by over 20-25 times by 2040, according to the IEA’s Sustainable Development Scenario.
Electric vehicles meanwhile require around four times the amount of copper of a conventional engine, while solar panels and wind energy technologies are up to five times more copper-intensive than traditional power generation systems.
But long lead times to develop projects and the fact that many untapped mineral deposits are in underdeveloped locations with higher risk profiles is a challenge
not just for the supply chain but also for customers, Sobotka noted.
“If you push a supply chain too hard, you get environmental, social and governance (ESG)
compliance problems – issues in cobalt with child labor, environmental issues with nickel,
for example – because people start to push production too hard and consequently push the rule book too hard,” he said.
This means that, all too often, consumers will not be able to tell whether the product they have bought has been produced using bad practices, Sobotka said.
Despite industry initiatives to create more transparency, he noted that greenwashing still
exists, particularly with regard to violation of ESG global rules on CO2. “It’s a real problem and it’s unsustainable. We do need a lot more transparency in the supply chain, more data, to give consumers a choice,” he added.
For its part, ERG is a founding member of the Global Battery Alliance (GBA), a World Forum Initiative-backed group whose ten key principles are designed to establish a sustainable, ethical, and inclusive battery value chain. As a specific immediate priority, the
GBA aims to guide the development of a ‘battery passport’ to enable a transparent value chain with respect to human rights and the environmental footprint of batteries, for example.
According to Sobotka, to produce sustainably and in compliance with global ESG regulations, the pace of the energy transition has to go slower. This means the growth rate of electric vehicle sales should be 20-30% per year, not 50-100%, or else it will stimulate practices such as the production of artisanal cobalt in the DRC.
“The sector that expands the fastest ignores all the rules, typically. But if you want to have an environmental impact assessment, manage the water, work with communities, you can’t do these things quickly – they take time and investment and can’t be accelerated,” he said.
“There has to be a balance on the one hand between making sure you all agree on your global rules and targets, and on the other hand making sure the supply chain has the ability to do this in a compliant way. There has to be more enforcement because at the moment there’s a level of deniability on the customer side,” he added.
As governments around the world step up efforts to diversify and near-shore their supply chains, there remains the ongoing problem that the critical minerals they are seeking are distributed very unevenly.
The single largest producer of oil has less than 10% of the world market. In contrast, there are dominant producer nations for metals that are key to making the energy transition. Cobalt production is centered in the DRC, while nickel is in Indonesia and Russia, and lithium is in Latin America and Australia. This means there has to be more diversification when seeking supply, Sobotka said.
“Currently, governments proclaim targets without the tools in place to implement them. You have governments trying to diversify their supply of raw materials – and very explicitly stating so, as we have seen in the European Union (EU) and United States – but you don’t see investments that follow those targets,” he noted. “Just leaving it to the private sector is going to be very difficult because a key reason for the uneven distribution of production is its cost,” he added.
For example, the current cost of producing nickel in the world’s biggest mine in Russia is a fraction of the money it will require in the future to produce nickel using high-pressure leaching technology in Indonesia, which will also require significantly more energy, Sobotka highlighted.
Regionally diversified supply chains are typically found in countries that have a higher risk profile
“Another big challenge is that regionally diversified supply chains are typically found in countries that have a higher risk profile. Some of those sources of supply will meanwhile have significantly higher CO2 footprints, which is another issue – the new frontiers have lower grade minerals, and you use a lot more energy to achieve the same results,” he said.
Even if governments do diversify their supply chains, they face the problem that they do not control the midstream production processes such as refining plus cell and battery manufacturing, which are predominantly located in China, Sobotka noted. This makes gigafactories a great idea to reduce CO2 emissions, but better suited for those with a more integrated supply chain, he said.
“About 70% of the world’s battery-grade cobalt is produced in the DRC; imagine if Saudi Arabia produced not 10 million barrels a day but 70 million a day, and they were all refined in China – that would be unthinkable. Every major country has its own refinery for oil, to ensure its energy supply, but in batteries that’s not the case,” he added.
To get it right, Sobotka noted that regulators need to ensure that supply chains – which are vulnerable to shocks and geopolitics – are end-to-end and provide sovereignty.
There is however another catch: the energy transition requires more mining and metals processing operations, which are often opposed by the public amid perceptions they are highly polluting, energy-intensive and with poor ESG credentials. But, Sobotka said, driving an electric vehicle requires the energy intensive production of the raw materials required.
“Unless the energy you produce is low-carbon or carbon-neutral instead of coal-fire powered, the ultimate CO2 footprint of the battery or energy storage system in a solar park or wind farm will be significant. Over time you can reduce that footprint, but it’s not necessarily going to happen across the board,” he added.
Embedding circular economy approaches is one of the key principles, but this is still at a very early stage in practice, partly due to restrictions such as on the cross-border movement of electronic waste, Sobotka said. “Circularity could be a major contributor to lower CO2 emissions; recycling should always be the cheapest material and the lowest
CO2-emitting material in the supply chain,” he added.
Volatility in the price of raw materials remains a major concern for automotive companies, which tend to be more cost-focused than other industries. According to Sobotka, the problem is less the price level and more the price volatility, which is very hard to forecast.
“If a lot of companies dictate dollar per kilowatt prices, then the battery maker has to take the volatility, and that therefore tends to be a risk that only large corporations are willing to assume,” he said.
However, battery manufacturers still struggle to push costs along their supply chain to refineries that work on a cost-plus or refining surcharge mechanism, limiting how much can be passed on, Sobotka said. It is a structural imbalance, which used to exist for platinum group metals in the catalytic converter until the industry found mechanisms to balance that out, he added.
“There’s always a balance between performance and cost. You can probably predict the performance of battery chemistry to a certain degree and how quickly you can get there, but because you’ve got so many metals in its composition it’s impossible to forecast the cost.
Technology plays an important role because there’s a constant change in battery chemistries,” he told Metal Market Magazine. The desire to reduce the percentage of cobalt has, for example, made lithium-iron-phosphate (LFP) batteries more attractive, especially in China, Sobotka said. Currently, however, the cost advantage for LFP batteries to nickel-cobalt manganese batteries has been almost eliminated as lithium prices have increased, he noted.
The Chinese battery ecosystem seems to have more risk appetite with upstream investment
This volatility means there will likely be more diversity of battery chemistries, Sobotka said, with some segments targeting cost and others targeting performance, which will in turn require diversity in the technology used. “That’s great because it diversifies the raw materials and makes it easier for the supply chain to source them, but at the same time it makes it harder to recycle and create circularity because the chemistry is more complex,” he added.
OEMs taking equity
While auto manufacturers in the developed world are not currently going down the equity route to secure raw materials, they are increasingly going down the contractual path, locking in offtake with long-term agreements.
ERG is receiving requests for those kinds of arrangements, and Sobotka said this makes sense in theory, although it is not always practical to fulfill. “If I were to take all the requests for long-term agreements, we’d be outsold three times over for the next ten years, and we can’t do that because we don’t know which car manufacturer is going to win. That race is still undecided and it’s still very dynamic, so we have to be diversified,” he added.
By comparison, some Chinese battery makers are more aggressive on taking equity in operations, including Contemporary Amperex Technology Co., Limited (CATL), which has via various partnerships taken stakes in battery materials operations. “The Chinese battery ecosystem seems to have more risk appetite with upstream investment, particularly as many are semi- or government-owned companies. The risk is shared across more shoulders. It would be very difficult for a European automaker to buy a major mine and try to operate it,” Sobotka noted.
But he predicted this might change in the developed world in the future, depending on how tight raw materials supplies become. “It may make sense to invest $1 billion in a lithium mine and secure your offtake for something that will be sold for 20 times the value of the lithium in the car. It’s the same for cobalt – the value of your phone is $1,000 and the value of cobalt in it is around $1-1.50,” he said, adding: “You might want to buy a cobalt mine for $1-1.50 in your product that is worth $1,000, because the multiplier is so large and without the cobalt, you can’t build the phone or sell the car.”
Tracking and tracing
The EU Directive on Batteries, which will force companies to disclose the CO2 footprint of their raw materials, is at the forefront of regulation, Sobotka said, and it is setting the tone for other countries across the world. This means more supply chain tracking tools will follow in other regions, he forecast.
In partnership with China Molybdenum Co Ltd and Glencore as well as battery materials supplier Umicore, ERG launched Re-Source, which uses blockchain to track cobalt and other battery materials from mines to electric vehicles. Tesla has also been taking part in this initiative.
Responsible cobalt tracked in the Re-Source pilots should command a premium going forward, Sobotka said. “At the moment, it’s not possible to get the premium to justify the investment we’re making, so we’re doing it because we think it’s the right thing and because it’s sustainable, not because we’re making any money from it. That shouldn’t be the case – we should incentivize good behaviour, because the ability for us to penalize bad behaviour in a supply chain is very limited,” he added.
It took some time for green premiums to be accepted by the aluminium industry, but customers do now pay more for sustainably produced material.
Sobotka noted, however, that aluminium has fewer steps in the supply chain compared with the numerous stages needed to create a battery for the automotive sector and is typically produced in lower risk jurisdictions.
“It’s very hard to track CO2 emissions in the battery supply chain because it comprises multiple materials with different characteristics and the chemistry is complex. Green premiums will come and, in the meantime, we have to invest and eventually we’ll be able to seek a differential or premium for good behaviour,” Sobotka said.
Traditionally a diversified miner with exposure to different end-industries and geographies and the more stable returns that spread provides, ERG has shifted its investment focus to commodities vital to the energy transition. “You’re not seeing us close or open mines just due to current trends, but you are seeing a pretty dramatic shift in the investments and the investment allocations that we make. We have a lot more exposure now to the energy transition,” Sobotka said.
In addition to its existing cobalt operations in Africa, the company is considering projects that can take its annual cobalt production from 20,000-21,000 tonnes currently to at least 45,000 tonnes. It is also working to reduce the CO2 emissions of its energy inputs, expanding its renewable energy portfolio, and potentially even creating a different division with a separate allocation of capital.
Copper – dubbed the “new oil” by Sobotka – is also a long-term play for ERG, with the company bullish on its prospects given the metal’s role in the energy transition.
“The current exposure of copper to battery raw materials is tiny – around 2 million tonnes – compared to the total market of around 25 million tonnes, and this will need to be doubled or tripled in the very near future. But it takes a very long time to generate significant new mines and we’ve just come out of a five-year trough of exploration,” Sobotka said.
“Typically, when prices go up, miners start to buy junior mining companies, but there really aren’t that many juniors out there because they either exited in 2018 or haven’t found anything as they weren’t well-enough funded,” he added.
Many majors are now ramping up exploration, something that is being seen in drill rig rates, where wait times have significantly increased. Even when new discoveries are made, they tend to be smaller, less efficient, and higher cost, Sobotka said.
In a scenario that meets the Paris Agreement goals, clean energy technologies’ share of total demand could rise to over 40% for copper by 2040. ERG will be contributing significant additional copper to the markets over the next couple of years, including copper in concentrate from its Frontier Mine situated on the DRC-Zambia border, and output from the expanded Metalkol RTR facility in the Kolwezi area of the DRC.
ERG will be contributing significant additional copper to the markets over the next couple of years, including copper in concentrate from its Frontier Mine situated on the DRC-Zambia border, and output from the expanded Metalkol RTR facility in the Kolwezi area of the DRC.
High-grade iron ore is the future because it will lead to lower CO2 emissions and allow companies to go down the hydrogen route to produce DRI
As companies focus attention on their energy sources, ERG is also betting on high-grade iron ore as a key material for the future. The company operates Sokolov Sarbai
Mining Production Association (SSGPO) in Kazakhstan, the country’s largest iron ore business with several open pit mines and a processing plant. Annual capacity at the site is 40 million tonnes of iron ore, eight million tonnes of concentrate, and eight million tonnes of pellets, servicing markets in Kazakhstan, Russia and China.
It also operates Bamin in Bahia, Brazil, which has projects including the Pedra de Ferro mine in the Caetité region, and Porto Sul, in Ilhéus. First production at Pedra de Ferro began last year; at full capacity of 18 million tonnes of iron ore annually, Bahia will become the country’s third-biggest producing state for the raw material.
“In Brazil, the iron ore we produce has the lowest carbon footprint you can buy because it has very low impurities and has a 67% Fe grade. That doesn’t sound much higher than Australian grades, but the corresponding reduction in coking coal consumption translates into a massive reduction in CO2 emissions,” Sobotka said.
“High-grade iron ore is the future because it will lead to lower CO2 emissions and allow companies to go down the hydrogen route to produce direct reduced iron. High-grade iron has a $30-40 premium over the standard grade; we can easily see a long-term $40 premium and higher for 65% Fe grade,” he added.
In ferro-alloys, ERG refines and smelts in Kazakhstan through TNC Kazchrome, which has a very low, competitive energy cost. Its major competitor, Sobotka said, is the Chinese smelting industry, although restrictions on energy supply, electricity price hikes and winter shutdowns have seen prices there increase significantly.
Kazchrome assets include Donskoy Ore Mining and Processing Plant in the Aktobe region, one of the world’s largest chrome ore mining plants, with most of its production going to ferro-alloy plants in Aksu and Aktobe. It has an annual production capacity of 5.64 million tonnes.
ERG operates Kakakhstan’s sole alumina refinery and aluminium smelter, and is bullish on the outlook for the metal, Sobotka said.
Power cuts and energy price hikes in China, the world’s largest producer, have rebalanced international markets, he noted.
“Fundamentally, the aluminium price was too low for too long. It was just not sustainable. The Chinese industry was just not able to produce aluminium in the long-term without incurring major collateral cost impacts. It’s now rebalanced and we’re very positive for the rest of this year, particularly for producers with low-carbon emissions,” he said.
Diversifying or adding to the ERG portfolio is not out of the question: Sobotka said the company screens around 500 projects annually, but has not yet found anything of the size or quality that would move the dial.
“We wouldn’t want to buy another 2,000-tonne cobalt producer because it just doesn’t help. It would have to be material but there are very few assets out there, and those that do exist have historically been bought by the Chinese government or investors,” he noted. According to Sobotka, 18 or 19 of the last 20 battery materials investments were made by Chinese investors.
“It’s a market very much dominated by one single geographic investor and there just aren’t many targets out there. We’ll focus on our own portfolio; we have plenty of very good assets that we haven’t developed in the past,” he added.
The challenge now is inflation, he noted, citing sky-rocketing costs of cement, drill rigs and staffing. “So many industry projects are making it a certain part of the way and then go into the cycle of re-evaluation to see whether they are still economically viable. It’s a difficult time to build something,” he said.
“These cycles were always there but now they are longer and much more expensive, which lifts the ceiling for price corrections because this next generation for materials in the energy transition sector that are coming onstream in the next few years will have been built with very high capex,” he added.
This article was originally published in the March 2022 issue of the Metal Market Magazine.