The energy transition requires a greater and much steadier supply of rare earths and other critical minerals to help with the build-out of electric vehicles (EVs) and other renewable technologies. Where do you think we stand in terms of supply and demand, and where do you think we’re going to be seeing the largest gaps in supply moving forward?
We often like to think about the supply chain for battery materials and EVs like a Swiss watch, where all different cogs and different materials need to move in perfect harmony. Looking forward, we have lithium, we have nickel, we have cobalt, graphite, manganese, a handful of rare earths that all need to come up in perfect harmony or one will bottleneck the other.
So, aside from where the gaps will actually emerge, I think it’s almost certain that we will see gaps, and that will put challenges on other markets. On the battery side of things, lithium is probably the greatest exposure given that it’s used ubiquitously across virtually all chemistries. But an often ignored blind spot in that battery supply chain is the rare earth side of things where, if we don’t have enough rare earths to satisfy demand for permanent magnet motors for EVs, then a portion of the industry needs to use alternative motors that are generally less efficient, and thereby needs to increase the size of their batteries to continue delivering on the range promise that their customers expect.
I definitely agree on lithium. It’s probably the one where you’re seeing that the biggest demand growth projections over the forecast horizon, for the medium term at least, and not much capacity in the next couple of years coming on stream. I think cobalt’s probably another one. We’re forecasting peak cobalt hitting in the 2030s before substitution kicks in, but that’s still going to need, in our view, about another 140, 150,000 tons of refined capacity. So where’s that going to come from?Where’s the feed stock going to come from?
I think it’s important to never forget graphite. It does go into the anode and it’s sometimes the ugly sister and people forget about it. So it’s tremendously important to have, especially in the immediate future as it seems demand for EVs is increasing and production is increasing as well. We need both natural and synthetic graphite.
I think that’s a very good point, Luisa. Graphite is often the poor cousin of the cathode, but there’s no substitution occurring in any short period of time. There will be some silicon doping and some partial substitution, but the total demand is going to increase. I think most people would agree that the synthetic carbon footprint, and the cost of synthetic, means that natural flake graphite is going to occupy a higher proportion of the anode going forward.
I see lots of statements around the potential capacity to supply the growth of the market, but the pragmatic analyst would have a rather more pessimistic view and say, “Well, some of these mines will be licensed, some won’t. Some of them will hit nameplate capacity within the predicted period and some won’t”. And then of the ones that do satisfy those two preconditions, it will take them two to three years to be qualified via the supply chain when you include the downstream processing. So I think we’ve got a major issue looming.
We have more materials coming out of the ground, but they’re not necessarily usable until we build out all of these value chains
Do you see funding flowing into exploration? Is this somewhere where people are focusing right now?
The markets are fairly poor and the volatility is very high. So during this time, it’s very difficult for junior miners to raise funds that those economic cycles or market cycles tend to delay projects. So currently, it is difficult.
Fortunately, many juniors are well cashed because previously the prices of the commodities were high and there’s still a lot of interest. But in the case of lithium or even graphite, there have been other booms before or other times where investors were very interested and they got poor returns.
So I think as time has gone by and investors have gone, they’ve started to get more familiar with these strategic metals, they are more careful. So raising funds for early stage companies, you have to present very good results. So, they tend to be more attracted sometimes to later stage projects. So, juniors are trying to rely on government for support, and that is not perfect yet.
An interesting statistic is that roughly 95% of the exploration activities in lithium is being conducted by juniors. Rio Tinto is probably the only major mining firm that is currently showing an interest in lithium exploration. The market cap of juniors tends to be much lower than the CapEx required to actually liberate a meaningful resource. And with lithium, rare earths and nickel, often that market cap is between US$0.5B and US$2B. Graphite tends to be a bit low because it’s closer to surface and a bit easier to mine. In the case of the other major metals, the lithium, cobalt and nickels of this world, you need very significant CapEx, and that’s not easily achieved. Particularly when some of the juniors fall into the trap of giving away free offtake to cell makers without requiring project equity.
So the best result for a funding outcome is probably 60% debt, and sometimes it’s as low as 50% or even 40% debt because of the perceived processing risks or the country risks. ECAs and other debt providers are not particularly comfortable with high leverage ratios for mining projects. So I think you’re going to really struggle to see some of the juniors, even where they’ve got good resources, fund their mines, unless they take a very aggressive approach with offtake.
Exploration is an area that is underfunded and the pipeline is insufficient for the demand almost across all of those commodities. But I would also say that it’s probably the most funded portion of the value chain that is coming up behind us. So, that’s a scary reality when considering that there aren’t sufficient investments going into conversion capacity, or metal making, or alloy making, or magnet making in the case of rare earths. So we’re walking into a position where, yes, we have more materials coming out of the ground, but they’re not necessarily usable in that form until we build out all of these value chains and connect them to end users. So that will remain a major vulnerability for these markets and will perhaps hinder their ability to become fully domestic.
Another one of the really big themes at the moment is the focus on nationalizing or having more regional supply chains. What role do you see for governments and are they following through on plans to grow their domestic industries?
I think there’s two big roles that government can play. One, is in helping define what the national targets are for things like electrification or for moving the grid towards more and more renewables. That signals to the market what that demand outlook looks like, and therefore what the needs are for that. Secondly, on the on the supply side, to help build out the supply chains to meet those needs. I think there needs to be a nuanced approach depending on what that region is. So in Europe, there’s long been a not-in-my-backyard mentality with respect to mining, but for the region to become self-sufficient, it really needs to move past that and consider opportunities for developing resources.
I think one of the mismatches that occurs is that certainly in Australia and the U.S., you have a federal policy and then you have various state policies. With mining, the licensing often comes down to the state level and different states have very different approaches, from an environmental perspective, and cultural perspective and sometimes rules around land claims by Indigenous groups and so forth. So it’s not a particularly cohesive approach that’s occurring, but certainly the U.S., I think, deserve credit and certainly Canada deserves credit for really starting to back localization incentives.
While Australia, Canada, and the U.S. are making these moves, what are other governments doing? In Chile, you’ve got, with regard to lithium, the government looking at the development of a legal framework for the sale of its concessions. You’ve got Mexico’s Congress looking to nationalize its early stage lithium resources. You’ve got Enterprise Générale du Cobalt looking to nationalize the artisanal sector in the DRC, which is the cobalt sector swing producer. So it’s interesting to see different governments’ approaches. There’s a mixture of nationalization and regionalization going on in different parts of the world.
What are some of the impacts that we’re seeing from this shift away from the processing and refining of these key metals in China?
I would suggest that the shift is early stage and that there isn’t a lot of processing that has yet left China, but we’re seeing momentum in that direction. Ultimately, China has built up this dominance in processing and production of so many materials by historically leveraging the lower environmental practices of producing those materials that others would have to incur. I think we’re moving into a reality where we’re going to soon have a tangible value on the difference in those environmental practices. That will translate into tariffs or other penalties that level the playing field and help expedite the movement of that process and capacity, back to the West or just shifting some of it to the West.
I certainly agree with that. I think it is early stage and it’s going to be a long path towards any decoupling, but it does feel the breaks are starting to go on with regard to globalization. I mean, the last few years have seen trade wars, and sanctions, and divergent responses to COVID-19. Critical materials are still going to be a key battle ground or area of interest within this. The anticipation is more friendshoring or nearshoring shorter supply chains, more economic security prioritization in this space and alliance-centred strategies.
Will the West or the rest of the world be able to produce these metals, materials and compounds and then price them competitively? Or are the OEMs or battery makers or chemical companies like Umicore and BASF, are they then prepared to purchase these materials at higher prices and then pass that to downstream? Are we prepared to pay US$125, US$150 per kilo for neodymium and praseodymium, or would prices fall down to US$50 and would that be economic? So, that’s just an example. Would lithium stay at US$60 and $70,000 per ton forever or will it come down to historical levels below US$10,000 per ton? And would that be economic? Can we develop supply chains outside China at those levels and are the downstream players prepare to pay a higher price for these commodities?
Multilateralism and globalization are clearly under threat at the moment, and the geopolitics determines the fate of multilateralism. The concentration risk that exists around China is simply not justified commercially. So any risk management department for an EV OEM has to look at currency risk, market risk, customer risk, supplier risk and so forth. When you find dependencies where a single supply, for example can, if they were not to supply you or if an issue where it occur, be it a force majeure issue or a geopolitical issue, or just a pricing issue, such that, that would totally interrupt your supply chain, then that’s unacceptable.
What do you see happening in terms of this regionalization or de-globalization?
I would just add that we looked far ahead and it’s clear to all of us that we’re moving towards a widespread electrification, and a wide adoption of renewable energy sources. What’s unclear is how quickly we’ll reach full electrification or full renewables. But I think that we should certainly expect a bumpy ride along the way. We’ll get there eventually over a long enough time course, but it will by no means be a straight vector there. And with that we’ll have bottlenecks, and we’ll have surpluses, and we’ll have price spikes and price drops. So if you’re a long term believer, then keep your eye on the prize but expect a lot of noise in the meantime.
There’s no way that these markets can double, triple, or quadruple in size without some bottlenecks. I think in the near term there will probably be some very short term bottlenecks ahead. It’s going to be a difficult winter I think, in Europe. China’s still wrestling with its Zero Covid policy and a failing property and construction market. So some challenging months ahead, but after that, there may well be a recovery early 2023 that really helps to kickstart some of these critical material markets for another growth cycle.
I think in the near term, we will still be dependent on China. And by the near term, I’m saying between now, 2025, 2026. I think 2027 is going to be a critical time. We probably will see more adoption of EVs, and that’s where I think there’s going to be significant potential shortages. So it will be interesting to see how the rest of the world be able to respond to that. But in the near term, I think China has the capacity, has the expertise, and we are highly dependent.
I would conclude that the move to electric vehicles is now irreversible. The decisions that have been made at the highest levels by all, not just some, but all of the major OEMs that are household names, are such that they’re going to over the next five to 10 years, virtually wind down their ICE capacities
We’ve seen huge logistics issues due to COVID-19, and currently you’ve got this absurd situation where you’ve got ore being mined somewhere, sent somewhere else for initial processing, sent somewhere else for refining, then sent somewhere else for being converted into precursor, cathode active material, and then somewhere else to be put into a battery. That’s not tenable. It’s a terrible carbon footprint when it comes to transportation and a terrible risk when it comes to logistics, which has been heavily disrupted.