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As the mining industry converges for LME Week, a pressing question looms: will consumers be willing to shoulder the costs of sustainable metal production?
At the FT Mining Summit‘s panel on “Supply, demand and decarbonization” in London on September 26, industry leaders grappled with the challenge of balancing sustainability investments against rising inflation and the question of who will pay for operational costs.
Tomas Kuta, Head of Public Affairs at Volvo Construction Equipment, highlighted the industry’s dilemma: “Cost is a barrier to change, not only in the mining industry, but in all customer segments. So new technologies are more expensive initially.”
According to Kuta, while some “front-runner customers” with science-based targets are willing to invest, “not all customers are able to pay that green premium.”
To address this challenge, producers are seeking new business models to share ‘green premium’ risks.
There are also concerns that price-sensitive consumers are not prepared to pay a “green premium,” despite what original equipment manufacturers (OEMs) and others on the supply chain had expected, according one mining source. This raises the question of who will pay the additional cost if lower-priced alternatives are available.
Kuta revealed that Volvo is “looking into how we can share more and more of that risk through new business models, like equipment as a service, where the machines remain on Volvo’s balance sheet.”
The mining sector is seeking a collaborative approach to verify sustainability claims.
Kenta Saito, general manager of base metals division at Mitsui & Co, emphasized the importance of joint efforts: “There needs to be a joint effort throughout the industry to find those new technologies and to actually have them become more popular and prevail and be implemented in every part of the world.”
Kuta called for “CO2 pricing, green public procurement and things that can bring the cost down and help this transformation to happen,” rather than “massive subsidies.”
Volvo’s executive reiterated that cost remains a barrier to sustainable mining technologies.
“New technologies are more expensive initially, and volumes of serialization machinery, for example, you get those volumes up to bring the cost,” Kuta said.
Iván Arriagada, chief executive officer of Antofagasta, said technology is driving rapid sustainability gains in mining.
“If I look back five years from now, in the case of some of our sites, we’re running fully on renewable energy… By 2026, 90% of the water that we use will be water from the sea,” Arriagada said. “We are recovering extra water as well in our processes… We’ve got an autonomous fleet.”
Panelists at both days of the summit highlighted the role of technology in bringing down costs over time. Digitalization, automation and artificial intelligence were cited as key tools to optimize operations and manage higher electricity requirements.
Alex Richards from Schneider Electric cited opportunities to increase efficiency and reduce over-engineering in new and retrofit projects.
Nicholas Snowdon, head of metals and mining research at Mercuria, highlighted the growing opportunity in the metals market due to the energy transition.
“In the first four years of this decade, we’ve seen the copper market increase by the same degree that we saw in the entire 2010s,” Snowdon said. “And we think that… 2028 will have nearly matched the entire growth of the market from the 2000s and 2010s.”
However, a disconnect persists between the industry’s sustainability efforts and market valuations.
“If you look at renewable energy companies or electric car companies… they trade at very high multiples, as opposed to mining that produces a lot of cash, but trade at lower multiples, even though those metals are needed for those companies to actually deliver on the growth promises,” Arriagada said.
On the second day of the FT Mining Summit, another panel provided additional perspectives on the challenges of satisfying demand for low-carbon metals and overcoming the price premium.
Luisa Orre, chief procurement officer at Stegra, highlighted the critical role of access to abundant, low-cost renewable energy in scaling up production of low-carbon metals.
Orre noted that Stegra’s green steel plant requires 2,000 megawatts of power, which they can access for just €30 ($33.47) per megawatt hour in their chosen location.
However, Richards said that many existing producers in Europe face much higher energy costs, potentially limiting their ability to transition to greener production methods.
The panel noted that green premiums for low-carbon metals currently range from 20-30%.
While this poses affordability challenges, Orre said that green premiums provide an important incentive for decarbonization investments. She suggested that the combination of carbon pricing on high-emission production and premiums for green products will help drive the green transition.
Richards predicted an interesting dynamic as both supply and demand for green materials increase, with construction potentially joining automotive as a major source of demand. This could maintain healthy green premiums while expanding the market.
As LME Week approaches, the industry faces the challenge of bridging this gap between green demands and market valuations.
Arriagada suggested a potential solution: “The bit that we need to get probably better at is engaging those that actually benefit from mining, or that are impacted by mining. [We should] talk about the industry more than ourselves in a more consistent way.”
A number of price reporting agencies, including Fastmarkets, have launched low-carbon premiums to assess if consumers are paying more for “green metal.”
Fastmarkets launched its first low-carbon aluminium price in March 2021. On September 6, the aluminium low-carbon differential P1020A was assessed at $0-30 per tonne.
The low level indicates that spot market buyers aren’t paying a significant premium for low-carbon aluminium in Europe.
In response to the perceived lack of premium, Fastmarkets recently consulted the market about a proposed low-carbon differential that would capture liquidity over a longer timeframe.
On May 1, Fastmarkets launched a low-carbon nickel price. Fastmarkets assessed the nickel briquette low-carbon premium, CIF global at $200-660 per tonne on September 2, narrowing downward from $200-815 per tonne a week earlier
So far there is little evidence of consumers paying a premium for low-carbon nickel.
“Premiums for low-carbon nickel don’t exist,” Eramet Indonesia’s president director Jerome Baudelet said at Fastmarkets’ International Critical Minerals and Metals Summit in Bali, Indonesia, on September 5.
“If you talk to a stainless steel mill or an OEM and ask them to pay a premium for green nickel, they won’t pay a dollar more… It’s clear that the world needs the miners and processors of nickel to be greener, but a low-carbon premium isn’t being paid at the moment.”
A global supply glut in nickel has pushed down nickel prices this year.
“The nickel price has remained weak,” Fastmarkets analyst Olivier Masson said. “Because the market has remained oversupplied. Less so than last year, but still an oversupply.”
The disconnect between sustainability efforts and market valuations presents both challenges and opportunities for the mining industry. How this gap narrows — or widens — is believed to affect the future of sustainable metal production.