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By Tim Ford, investment director, at Rathbones
A RECORD $495 billion was invested in renewable energy globally in 2022.
Renewables accounted for 29% of global power generation last year, and the International Energy Agency forecasts this figure will rise to 35% by 2025. With the shift to a low-carbon energy system well under way, demand for the minerals essential to the production of clean energy technologies is set to rise dramatically.
This is true, in particular, for lithium, a necessary ingredient in the efficient battery storage that is necessary for renewable energy to become our primary source. The IEA estimates mineral demand would need to quadruple by 2040 to build enough clean-energy infrastructure to meet the goals set out in the Paris Agreement on combatting climate change.
Electric vehicle and battery manufacturers are expected to be major consumers of these critical minerals, with demand from these industries expected to grow by at least 30 times by 2040. Transportation in general could account for a significant proportion of critical mineral demand.
Some automakers have committed to phase out the production of internal combustion engines, replacing them with hybrid or fully electric models, and the UK government has banned sales of ICE cars from 2030 onwards. Will there be enough critical mineral supply to enable companies and countries to deliver on these commitments? Even if there is, can it be mined ethically and in a way that does not compromise decarbonisation objectives?
A variety of lithium-ion chemistries are used to manufacture EV batteries with different performance characteristics, enabling EV makers to produce vehicles at a range of prices. Lithium is used in virtually all the different battery chemistries, with other materials such as nickel, cobalt, manganese, aluminium or iron being interchangeable.
Can supply keep up with demand?
Battery prices have come down rapidly since 2010. But for the first time in over a decade, prices rose year-on-year in 2022 amid surging lithium, cobalt and nickel prices.
Although prices for these key EV battery materials have since come down, concerns over whether battery raw material supply will be able to keep pace with demand have heightened.
The IEA forecasts that only half of projected lithium and cobalt needed to fulfil decarbonisation objectives will be supplied by 2030, based on expected supply from existing mines and projects under construction. Lead times to move mining projects from initial discovery to production average 16.5 years. Concerns that the quality of raw materials being mined is already declining are coupled with risks that mineral supply and refining capacity – often heavily concentrated in certain countries – could be disrupted by geopolitical tension. There are concerns that supplying enough critical minerals to electrify the planet will not be achievable.
Finding the right deposits of raw materials such as lithium is a major challenge, and there are steep hurdles to be overcome to get raw materials from the ground at the scale needed and convert them into battery materials. Yet some see cause for optimism.
For example, Tesla’s de-facto chief technology officer Drew Baglino believes that, based on US Geological Survey estimates for global critical mineral resources, there will be more than enough supply of nickel, lithium, zinc, copper and cobalt etc to meet cumulative demand until 2050. Although this is at odds with the IEA forecasts mentioned above, Baglino is optimistic that ‘the more we look, the more we find’.
Affiliates of the Breakthrough Institute, a US-based research centre focusing on technological solutions to environmental challenges, echoed Baglino’s sentiment in a paper published in the scientific journal Joule. They concluded that global reserves of critical materials are sufficient to meet future demand from all the infrastructure needed for electricity generation and storage, including EV batteries.
Progress is being made in boosting processing capacity and finding new critical mineral deposits. Companies in North America have been scrambling to build out mining and refining capacity. General Motors recently invested $650 million in Lithium Americas to secure access to lithium extracted from the Thacker Pass, America’s largest known source of lithium.
Is there a net positive for the planet?
Even if critical minerals can be supplied quickly and plentifully enough for EVs to rule the roads and oil refineries to be replaced with wind farms, can this be done in a socially responsible way and without threatening emissions reduction targets?
The Breakthrough Institute estimates that the mining and production of materials for use in the global electricity infrastructure will produce somewhere between 1% to 9% of the annual budget for global carbon emissions as set out in the Paris Agreement for limiting climate change. Though this is a small contribution to overall emissions, there is clearly a wide range of possibilities and, at the high end, 9% would still be substantial.
Although manufacturing a battery EV is slightly more energy intensive and polluting than producing an ICE vehicle, the greenhouse-gas emissions over the lifetime of EVs are estimated to be around half those of ICE cars, with potential for this to come down even further with improvements in efficiency and as low-carbon electricity becomes a larger proportion of the energy supply.
While it appears that the environmental benefits of the transition to EVs outweigh the costs of mining to support it, the social element needs to be managed carefully, and investors have an important role to play on this front. The cobalt supply chain has come under increasing scrutiny in recent years, after Amnesty International exposed the prevalence of child labour and other human-rights abuses in small mines, using more basic methods, in the Democratic Republic of the Congo, the world’s largest source of the mineral.
Responsible mining has long been part of our stewardship team’s engagement agenda. In 2019, Rathbones was the lead investor in an engagement with Microsoft over the responsible sourcing of cobalt. In the same year, we also became members of an investor group formed in the wake of the Brumadinho tailings dam disaster.
More recently, we supported the launch of a global investor group that monitors systemic risks related to meeting the increasing mineral demand required for the energy transition. Through these activities, we hope to be able to play our part in ensuring critical minerals are mined in an environmentally responsible way that does not harm local communities.
