Reviewing prospects for the energy transition | Hotter on metals

The opportunities and challenges posed by energy transition are complex; here the most pressing are summarized to give a broad view of the progress for prospects

If any proof were needed of the importance of energy transition and the structural changes being made by global corporations to achieve it, the investments that international automakers are making to secure the key raw materials they need for the electrification of vehicles provide it.

Their efforts to secure offtake agreements for them accelerated during 2021, but these original equipment manufacturers (OEMs) are going a step further by looking at investing directly in mining companies and projects themselves.

The change in approach has in part been hastened by the Covid-19 pandemic, which exacerbated supply chain risks around the world. Automakers felt the consequences of these disruptions very acutely when they were hit by a chronic shortage of semiconductors – a situation that continues to impact many OEMs even today.

The latest emerging trend among automakers demonstrates exactly how important it is for OEMs to de-risk their supply chains and transform the purchasing structure of their businesses.

Partnerships and investment

It is already starting to happen. In July last year, for example, US auto giant General Motors invested in Controlled Thermal Resources’ Hell’s Kitchen lithium extraction project, a Californian lithium project near Los Angeles, California. This project is expected to begin producing lithium in 2024, with the output to be used in GM’s Ultium battery cells, which are being manufactured as part of a joint venture with LG Energy Solution.

This means GM has secured a stake not only in the production of a key mineral used in its batteries, but also in the battery cell manufacturing process. BMW has invested in California, United States-based Lilac Solutions, which is working with Australia’s Lake Resources to develop the Kachi lithium brine project in Argentina.

These moves are expected to be replicated by other auto firms, which have set up teams specifically tasked with looking for merger and acquisition or investment opportunities in the battery raw materials sector. Automotive OEMs have been busily working to secure as much of the cobalt, lithium and nickel that they can source to feed the development of their batteries through commercial supply arrangements.

US electric vehicle producer Tesla now has separate offtake deals for nickel with mining companies BHP, Rio Tinto joint venture Talon Metals, and Prony Resources, as well as for graphite with Syrah Resources and separate deals for lithium with Livent, Ganfeng Lithium and Sichuan Yahua. It is also reported to have signed a cobalt supply deal with Glencore.

Tesla chief executive officer Elon Musk has expressed his desire to lock in supplies of nickel, appealing several times on earnings calls or social media for miners to mine more of the raw material. The automaker has also secured the rights to a lithium deposit in Nevada, where it aims to produce lithium from clay deposits using a process developed by the company.

Protracted permitting

While automotive companies have clearly made some progress in securing the vital materials they need for their energy-transition products, further upstream the protracted metals and mining permitting process in the US has potential to limit the rate of further long-term progress unless it is revised.

With some irony, given their importance to achieving energy transition and the reduced greenhouse gas emissions due to result from it, a more intense focus on environmental, social and governance (ESG) issues has been accompanied by additional scrutiny applied to the permitting process, which can add to these delays.

Ensuring that project credentials are impeccable is essential for the granting of any permit. Nobody wants to see a project fail to achieve what the industry calls its license to operate and discover a year or two later that poor safety standards led to a fatal accident, that the rights of indigenous groups had been infringed, or that environmental failures created spillages into local water supplies or added toxic emissions into the air.

Headwinds for copper

Copper is of course used in the modern economy for grid and electric vehicle charging infrastructure as well as renewable energy technologies, but there have been many examples of projects facing permitting delays for a variety of reasons over the years, including bureaucratic, environmental, community and political factors, among other things. It may have been triggered by a rush to progress developments in the race to drive the energy transition, but industry frustration about regulatory delays appears to have grown.

Delays often come from rejected permits, which then get tied up in the courts for months or sometimes years.

Looking for solutions

A solution may be to move toward a single-touch environmental approvals approach for mining projects, as has been the case in Australia; projects there can now take just two years to start construction.

If the world is to progress with technologies needed to decarbonize, it will need a lot more mining and metals projects, and soon. Developing them in a sustainable way with all stakeholders – including the regulatory authorities – working towards the same goal will be critical. Geopolitical developments unfolding since Russia invaded Ukraine do not bode well for a harmonious approach, while the perils of a high dependence on other nations for the security of physical commodities have been underscored by the growing crisis in energy supplies in Europe.

Quantifying the need

A recent study commissioned by Eurométaux, the region’s association of metal producers, highlighted that critical shortfalls loom without new primary metals supply and better recycling in the system soon, endangering Europe’s goal of a more autonomous clean energy system.

Meeting the European Union’s (EU) goal of climate neutrality by 2050 will require 35 times more lithium compared with that currently used, the study by Belgium’s Katholieke Universiteit (KU Leuven) found.

The transition to a net-zero carbon emissions economy will also require 33% more aluminium, 35% more copper, 100% more nickel, 45% more silicon and 330% more cobalt than is currently used, the report noted. These materials are all essential to Europe’s plans for producing the EVs and batteries, renewable wind, solar and hydrogen-energy technologies, and the grid infrastructure needed to achieve climate neutrality.

Recycling lies at the heart of the solutions to these looming shortages, the report said. By 2050, 40-75% of Europe’s clean energy metal needs could be met through local recycling if Europe invests heavily now and fixes bottlenecks, it added.

Europe’s challenge

According to the study, a paradigm shift is needed if Europe wants to develop new local supply sources with high environmental and social protections. “Today we don’t see the community buy-in or the business conditions for the continent to build its own strong supply chains. The window is narrowing; projects really need to be taken forward in the next two years to be ready by 2030,” the study said.

There is theoretical potential for new domestic mines to cover up to 55% of Europe’s 2030 needs, with largest project pipelines for lithium and rare earths, the study said. But most announced projects have an uncertain future despite Europe’s comparatively high environmental standards, struggling with local community opposition and permit challenges, or relying on untested processes, it added.

Recycling

The study found that by 2050, locally recycled metals could produce 75% of Europe-made battery cathodes, all its plans for permanent magnets production, and significant volumes of aluminium and copper.

“Recycling is Europe’s best chance to improve its long-term self-sufficiency. It’s a step-up that our clean energy system will be based on permanent metals which can be recycled indefinitely, compared with today’s constant burning of fossil fuels,” the report said. But the bloc “must act strongly now to raise recycling rates, invest in the necessary infrastructure, and overcome key economic bottlenecks,” it added.

The study noted that metals recycling, on average, saves between 35% and 95% of the carbon dioxide compared with primary metals production.

Recycling “will not provide a major EU supply source to Europe’s electric vehicle batteries and renewable energy technologies until after 2040, however,” the study noted.

“These applications and their metals are only just being put on the market and will not be available for recycling for the next 10-15 years,” it added.

Technology developments and behavioral changes will also have an important influence on metals demand after 2030, but these aspects could not be assessed in the study due to a lack of scenarios, KU Leuven added.

Investors’ approach

While demand for raw materials is growing from major OEMs and is stimulating their direct investment to secure them – and government policies, associated public funding and regulatory requirements are exerting strong influences over the rate of energy-transition progress – the mindset of institutional and private investors is also key to the pace of change. Those sources of finance are themselves affected by their perceptions of future end-product consumer requirements.

In fact, a shift in spending from high- to low-carbon assets as part of the energy transition culture could create the biggest reallocation of capital in history – and it is already fundamentally reshaping investors’ approach to financing.

Banks, funds and private equity firms have raised the bar on capital allocation, meaning that the greener a company, project or technology is, the more likely it is to receive funding, and on improved fiscal terms. Companies that have immediate, credible strategies to reduce carbon emissions are being rewarded; those that do not are losing out.

At its simplest, sustainable finance refers to the process of taking ESG considerations into account when making investment decisions in the financial sector, leading to more long-term investments in green economic activities and projects.

The amount of money required for energy transition is enormous. According to the Securities Industry Financial Markets Association, investment in the sustainable finance market needs to increase by between $3 trillion and $5 trillion per year to achieve the net-zero ambitions set out in the 2015 Paris Agreement.

Challenges faced

While sustainable finance has become very popular, there are questions around the detail. How to know, for example, whether something is actually ‘green.’

Attention is typically focused on carbon emissions, with the result that high-carbon assets do not attract capital, but it is where emissions are the highest that the most investment – to reduce carbon – is needed.

There is still no globally accepted definition of what ‘low-carbon’ means, and measurement standards that do exist are sometimes poorly defined. This means there is no unified methodology for calculating the carbon emissions of a business or investment portfolio, which is something that is needed for financial instruments to be truly green.

The focus on carbon in itself is potentially an issue. While it is a key metric that sustainable financiers consider, there are numerous others that matter, including certification by an industry scheme, recycled content, and details of water or tailings management schemes.

Social factors such as health, safety and community relations, as well as governance-related aspects around culture, board composition and transparency, are likely to play an increasingly important role in the future.

Tectonic shift

Despite the various shortcomings in its present forms, sustainable finance is not going away. Under pressure themselves to prove their own commitments to sustainability, banks have pledged to mobilize billions in financing to the sector in the coming years.

There is an industry-led, United Nations-convened Net-Zero Banking Alliance bringing together banks that are committed to aligning their lending and investment portfolios with net-zero emissions by 2050.

It currently has 110 members, representing 38% of global banking assets, and has pledged to mobilize €200 billion ($208 billion) in sustainable financing in the 2018-25 timeframe.

As the challenges of sustainable finance get ironed out over time, green financing will accelerate.

According to giant asset manager BlackRock, investors have moved their money into sustainable investments at six times the growth rate of traditional investments, with assets globally now totalling $4 trillion across all ESG categories. Describing the move as a “tectonic shift” in capital, BlackRock chief executive officer Larry Fink said in his annual letter to shareholders in January that this is just the beginning. More is clearly yet to come.

This is an extract from an article in the latest issue of the Metal Market Magazine. To read the full article and more from the latest issue click here.

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