in Commodity News 08/10/2022
Fitch Ratings expects that demand for energy transition metals, such as copper, nickel, cobalt and lithium will rise by up to several hundred percent over the next two decades. An economy that relies on clean energy and zero-emission vehicles requires more minerals than one based on hydrocarbons.
Metals demand will be defined by chosen technologies and battery chemistries as well as government policies and investor behaviour incentivising energy transition. A huge supply response will be required from miners given that most of scenarios assume market deficits for most of green energy metals post 2025-2030.
Market deficit and high prices will support miners’ cash flows to provide for future investments. The ability of miners to cope with the challenge of energy transition will depend on operational strength, reserve portfolio and prudent capital allocation decisions.
Miners are enhancing their exposure to energy transition metals , which Fitch considers positive for their business profiles. Fitch put Anglo American plc’s ‘BBB’ rating on Positive Outlook in April 2022 , as the company delivered on production growth and is better positioned than its peers for the global energy transition, along with its conservative financial profile. Zijin Mining Group Co., Ltd’s upgrade to ‘BBB-‘ reflects the company’s deleveraging after the ramp-up of its major copper and other mine assets in China and overseas, and the benefits of diversifying its exposure to lithium carbonate with the acquisition of the 3Q project in Argentina.
BHP and Rio Tinto are reshuffling their portfolios to adjust to the green transition from their current exposure to the more traditional economy. Rio Tinto is focused on increasing its footprint to lithium and plans to increase direct participation in its large copper project in Mongolia. BHP aims to increase exposure to nickel and copper in its bid for Oz Minerals, the Australian producer.
Energy Transition Is Metal Intensive
Electric vehicles (EVs) and renewable energy are more metal intensive than their fossil fuel-based alternatives. Cobalt, graphite, lithium, nickel and manganese are crucial for EV batteries’ performance, longevity and energy density.
Copper is required for electricity generation, transmission and charging infrastructure due to its strong thermal and electrical conductivity. Aluminium is lightweight, has a high strength-to- weight ratio and is corrosion resistant. It is therefore used in wind turbines, solar cells and car bodies to partially replace steel. Rare earth metals are critical for the production of permanent magnets used in EVs and wind turbines.
An average EV run on nickel-manganese-cobalt (NMC) batteries requires 4x more copper and 30x more nickel than an internal combustion engine (ICE) vehicle, in addition to cobalt and manganese, which are not used in an ICE. The car body of an EV should also be lighter, resulting in partial replacement of steel with aluminium, hence battery electric vehicles (BEVs) are expected to require 40% more aluminium.
Compared to conventional coal and gas power generation, wind, especially offshore, and solar photovoltaic is far more metal intensive, relying on aluminium and copper. The generation of 1 MW of electricity from solar and wind offshore uses, on average, 12x more metals compared to coal and gas.
Platinum is used as anautocatalyst for diesel fuel cars and palladium in gasoline vehicles, with the latter accounting for 80% of industrial palladium demand. Tightening emission regulation on ICE vehicles will support medium-to-longer term demand for platinum group metals (PGMs), although a shift to EVs will nullify this demand. On the positive side, since the technology of hydrogen-based fuel cells gains traction, it will provide a substantial support for platinum demand.
Demand Will Rise, Pace Will Vary
The higher metal intensity of the green economy will result in a boom in demand for metals. The growth rate will vary by material and depend on technologies and environmental policies. We anticipate that the demand for metals used to generate low- emissions energy will peak by the 2040s, when the bulk of green infrastructure will have been built.
A transition to net zero emissions by 2050 would require six times more mineral inputs than today, according to the International Energy Agency (IEA)1. The specific growth trajectory of each metal is different and will be determined by several factors.
Uncertainty remains about specific technologies in a fossil-free economy. There is a range of NMC (containing combination of lithium, nickel, cobalt and manganese oxide) and LFP (lithium, iron, phosphate) battery types and fuel cells technologies. The choice of technology will result in different metal consumption rates. For instance,the IEA estimates that, depending on the battery chemistry, demand for cobalt might be 6x to 30x higher than today by 2040. The green technologies chosen will have to be low cost and highly efficient. Metals with higher prices and low availability will likely be substituted, a particular risk for copper, which can be replaced by aluminium in some cabling applications. The commercial application of hydrogen, which is expected to be at the cornerstone of decarbonisation in energy generation and industrial production, is also uncertain.
The carbon footprint will also be considered, as the value chain from extraction to refining should be clean. This is a challenge for aluminium, which has the higher CO2 emissions from production compared to the alternatives.
The pace of the transition will be shaped by regional and global environmental policies through incentives, like the funding of green hydrogen projects or EV subsidies or, on the other hand, the use of carbon taxes. Policies in China, which consumes more than half of metals globally, will have a major impact on metals demand.
Reputable international institutions have created various energy transition scenarios. The UN Principles for Responsible Investment’s Inevitable Policy Response Forecast Policy Scenario (FPS) is underpinned by existing and future policies that limit global warming to less than 2°C.
CRU presented a scenario based on higher global warming and less stringent environmental policies, resulting in a scenario between the IEA’s Stated Policies Scenario (STEPS) and ‘announced pledges’ (APC).
Under CRU’s scenario, the share of EVs in total vehicles fleet will be above 55% by 2045, while the UN FPS assumes 85%. The unknown scale of EV penetration creates a large uncertainty in the metals demand forecast.
The demand for metals to decarbonise economies differs from that for hydrocarbons in the way that metals are consumed to create infrastructure. As a result, demand growth is expected to decelerate when most infrastructure investments are made. Climate scenarios aligned with the Paris Agreement would assume that, in most developed and in some emerging economies, green infrastructure will be largely operating by the 2040s, after which demand growth will slow down or flatten.
Demand for primary metal will also be defined by the recycling rates of existing scrap. More scrap containing green energy metals will become available over the next decade, e.g. copper in use in China will reach the end of its useful life in large volumes in the 2030s. The use of batteries, when a feasible solution is found, will provide a source of secondary metal supply.
Supply Will Need to Catch Up
A rapid increase in demand for metals may not necessarily be met with an equivalent supply side response. While the level of available resources is estimated to be sufficient, mineral resources are often geographically concentrated and their extraction may be subject to challenges.
Mining projects have long lead times and require large investments. Average leadtimes from resource discovery to production averages 17 years – 12.5 years from discovery to feasibility and 4.5 years for planning and construction, according to the IEA. Copper, cobalt and nickel projects have the longest lead times. By comparison, lithium deposits have shorter lead times, of around 7 years.
CRU estimates that most markets for low carbon economy metals will remain balanced over the medium-term as committed and probable projects come online. Supply gaps might emerge after 2025, since the pipeline of new projects is not yet synchronised with the expected rise in demand created by the energy transition.
Along with the estimates of demand and return on investments, the commissioning of new projects will depend on the availability of funds for large capex projects, either internally generated or borrowed. Over the past decade, the financial discipline of most miners has improved, providing sufficient headroom for future investments. At the same time, a prolonged period of low commodity prices might result in delayed investment decisions. The quality of mineral resources is declining. Miners tend to have lower grade, technologically challenging pipelines with smaller deposits compared to those currently in operation. This results in higher capex and opex for new mines, including higher electricity requirements to process the ore. Innovations in mining technology partly mitigate the pressure on costs and allow the processing of lower grade reserves, including from tailings, which were considered to be not extractable, as well as increasing metal recovery rates.
Market Balances
Copper to Remain Tightly Balanced
Copper is used in cables, especially higher voltage, with large amounts required for offshore wind projects.
We expect the copper market to remain tightly balanced over the next five years, with the production of refined copper broadly in line with the supply from operating, committed and partially probable projects.
Post 2026-2027, this market will be more reliant on the pipeline of probable and possible uncommitted projects amid declining production at existing mines. This adds to the uncertainty , especially in case of delays and cost overruns.
Transition to renewables and EVs will be the key driver for copper demand over the next decades. CRU forecasts that the share of demand from green energy will rise from 6% in 2022 to 22% by 2045. Refined copper demand will rise 34% by 2050 from 23 mt in 2020. Under a more ambitious UN FPS scenario, copper demand will surge by more than 2x by 2050 from 2020.
CRU estimates that by 2032 demand for copper will exceed supply by 6.4mt. Estimated initial capital requirement to develop these volumes is at USD105 billion. Capex required for an average copper project is around USD1.5 billion for brownfield expansion and USD2.5 billion for greenfield.
Cobalt Undersupplied
EV batteries will be driving demand for cobalt in the mid-to-long term, although the precise growth rate will be defined by the chosen battery cathode chemistry. Cobalt can be partially replaced by nickel. Nickel increases energy density, but at the cost of battery life cycle and thermo stability.
Cobalt supply is highly concentrated, around 70% of cobalt is mined in DRC and a similar proportion of metal is refined in China. Based on the project pipeline the market structure is unlikely to change. Around 90% of cobalt is extracted as a by-product of nickel and copper mining, therefore its output will depend on the development of respective mines.
CRU expects that in the short-term the market will be balanced, but in the mid-term demand growth will exceed supply, although new projects in Indonesia could offset the deficit.
Lithium in Abundance
Lithium is used in all types of EVs and consumer electronics as they are based on Li-ion batteries. Lithium is a part of cathode and electrolyte in all types of batteries regardless of the choice of battery technology (whether it is NMC, LFP or other). Hence lithium has very bright prospects in almost any battery chemistry scenario apart from solid state or fuel cells batteries whose application is considered less probable. FPS assumed that lithium demand will rise by 5x over the next 30 years.
Currently around 30% of demand for lithium is generated from EVs and battery storage while it is expected that over 90% of demand in the longer term will be driven by these segments.
There is no shortage of lithium raw material. Lithium’s refining is concentered in China which processes 60% of metal globally. Lithium production increased 28% yoy in 2021 to 481mt. CRU expects that lithium supply will grow at 25% CAGR over the next five years in line with demand pace and translating in a balanced market. Although new production is subject to downside risks as it is largely coming from greenfield projects.
In the longer run projects visibility is lower due to short lead times and various environmental concerns related to water availability in Latin America and Australia, pollution from salt brine deposits. New production technologies, including direct extraction and unconventional brine deposits, will be supporting future project pipeline.
Nickel Dependent on Indonesia
FPS assumes that demand for nickel will rise 5x by 2050. Almost all of the additional demand for nickel will be its use in green energy technologies. The share of this sector in total nickel consumption will rise to around 60% by 2040 in IEA’s Sustainable Development Scenario from current 10%. At present almost 70% of nickel is used for stainless steel and corrosion resistant alloys.
Nickel market consists of two segments: Class 1 nickel with over 99.8% purity which typically originates from sulfide ores is used to produce nickel sulfate for battery cathodes. Class 2 nickel has purity below 99.8% and originates from limonite and saprolite ores; it is used for stainless and alloyed steel production.
The nickel market is expected to remain balanced, at least in the medium term; however, the pace of EV adoption will require a corresponding rise in supply of Class 1 nickel.
The majority of capacity additions will come from limonite ores in Indonesia which require hydrometallurgical processing (high- pressure acid leach, HPAL) to be suitable for batteries. Another technology to produce battery grade nickel is nickel pig iron (NPI)- to-matte conversion, also planned in Indonesia. Those technologies are not yet established and have faced delays in the past.
Indonesian policies and timely project starts will define the future nickel supply while demand will be shaped by battery chemistry.
Aluminum Deficit Post 2030
Aluminum demand is projected to grow in the range of 40%-50% by 2050 vs 2020. The market is expected to remain balanced until 2030 based on committed and partly possible project pipeline as well as capacity restarts. CRU estimates that market deficit will be increasing after 2030. CRU calculates long-run marginal costs for aluminum at around USD2,200/t in real terms, which will define long-term price. Introduction of carbon taxes and emissions trading schemes may raise the price further.
Green Transition Requires Responsible Mining
Producers of metals have to deliver increasing volume of material required for the future carbon free economy without compromising ESG standards. Below we are discussing the key ESG issues that miners face.
GHG Footprint The key energy transition challenge is to reduce GHG emissions across the whole metal value chain. Emissions intensity of cobalt, aluminium and nickel mining and processing is high, hence skyrocketing demand may result in rising net carbon footprint.
The largest source of emissions in metals production stems from electricity generation. In global aluminium production electricity accounts for 60% of GHG footprint, largely due to the fact that most of facilities are powered by thermal coal electricity especially in China.
There are three pathways to reduce emissions in metal production:
1.Decarbonise electricity source through shifting from coal to renewables generation;
2.Reduce direct emissions with e.g. inert anode technologies in aluminum;
3.Increase recycling and process efficiency through enhancing collection rates and efficiency of recycling, close loop manufacturing.
International Aluminium Institute (IAI) calculated that the industry has to cut its emissions by 80% by 2050 vs 2018 to comply with IEA’s 2 degrees scenario while during this time demand for primary aluminium will increase by 40%. IAI estimated that decarbonisation of energy supplies will require USD500 billion-USD1.5 trillion investments.
Environmental Impact
Other environmental issues for miners include waste management, land and water pollution, increasingly water scarcity and a loss of biodiversity.
Water scarcity and droughts have been significant contributors to mine disruptions. High water consumption is an issue in lithium production from brine reserves which is highly water intensive, besides these reserves are located in dry regions of Latin America . In addition, there is a high risk of water contamination and toxic leaks from sault brines.
Another method of lithium production is hard rock mining which in turn has high carbon footprint, but low water usage. An alternative production method is from unconventional resources or direct lithium extraction technology, both ways have had limited application so far.
Other ESG Issues
Social impact of energy transition includes relations with local communities and rights holders, labour practices and employee wellbeing. A large copper deposit of First Quantum Minerals Ltd., Haquira in Peru, is subject to ongoing negotiation with the local communities for resettlement which is ongoing for several years and extends the project development time.
Another example of social ESG issue are unacceptable working conditions and use of child labour in the Democratic Republic of Congo where currently around 70% of cobalt is mined. This issue may incentivise cobalt substitution in battery chemistry. Mining and refining of other energy transition metals like copper and nickel is also concentrated in locations with increased ESG risks.
Source: Fitch Ratings
08/10/2022
08/10/2022
08/10/2022
04/10/2022
22/09/2022
22/08/2022
13/07/2022
05/05/2022
19/04/2022
10/12/2021
18/11/2021