Q&A with Vivek Dhar, Head of Commodities and Sustainability Research, CBA
Can you start by telling us about your role at CBA? What’s your core focus?
I am the head of commodities and sustainability research at CBA. My coverage includes base and precious metals, iron ore, coal, oil, and LNG markets. Since 2022, my coverage has expanded to include Australia’s carbon, east-coast gas, and electricity markets. Australia’s energy transition is a growing focus in my research.
How do you see the pace of the global energy transition evolving over the next decade? What are the key drivers or bottlenecks?
I see the pace of the global energy transition being generally challenged by increasing pragmatism. This means looking at the energy transition through the lens of the ‘energy trilemma’ – that is a focus on affordability, reliability, and decarbonization.
Technology is the key driver. Some sectors have clearer pathways to decarbonization, like power and light vehicle transport, while other sectors are reliant on nascent technologies that are yet to prove their commerciality. Steel and shipping are examples of sectors that are still waiting for affordable decarbonization pathways.
Even in sectors where the decarbonization route is known, like the power sector, the complexity of delivering low carbon electricity has proven challenging. The complexity stems from the multiple supply chains that need to respond to ensure grid decarbonization. In Australia, for example, transmission is proving to be a key bottleneck. Even sourcing the necessary skills is proving to be a bottleneck in Australia’s power sector.
Which metals do you consider most critical to enable the transition? How is this shifting the demand dynamics?
Lithium and graphite are likely the most critical metals for the energy transition at present given current technological trends and the projected demand growth for these metals in coming years to enable the decarbonization of the transport and power sectors. The evolution of sodium-ion batteries will be a key risk to watch for lithium demand, while the speed that batteries try to move from graphite anodes to silicon anodes is the main demand risk facing graphite.
Rare earths, copper, and aluminium will be critical as well due to a lack of alternatives but have a shallower demand growth profile relative to lithium and graphite. Copper and aluminium are key substitutes for each other, but both these mature metals will be needed in adequate quantities for electricity networks and electric vehicles.
Cobalt and nickel are critical too, especially given demand projections in climate-ambitious scenarios. However, both metals have faced demand headwinds in recent years due to the shift towards battery chemistries without nickel and cobalt.
How are geopolitical factors impacting the supply chains for the key transition metals?
Geopolitical factors for western economies have largely revolved around China’s dominance across critical mineral and energy transition supply chains. Western economies have sought to either onshore these supply chains or at least establish supply chains outside of China’s influence. While onshoring solar, battery, and electric vehicle supply chains have been a focus by western economies as a result, supply chains that are required for defence technologies, like rare earths, have also become an urgent focus for western economies. For transition and defence technology metals, this has largely meant a strong focus on refined metal capabilities given China’s dominating market share in this part of the supply chain. However, attention on boosting metal ore supply where China has a dominant market share, like rare earths and graphite, has also garnered attention by western economies.
The reality for many western economies is that onshoring supply chains that are dominated by China often means incurring a higher cost base. This will push up the costs of the energy transition for consumers, especially in western economies. This has the potential to reduce the speed of the energy transition as consumers push back on adopting low-carbon solutions due to worsening affordability.
How are financial institutions adapting their strategies to support the industry at this moment?
Financial institutions are generally keen to support critical mineral supply chains. However, the nascency of some of these transition metal markets alongside cyclical lows reached recently for transition metal prices like lithium and rare earths, has meant that traditional debt finance has been cautious in assisting critical mineral supply chains in recent times. Offtake agreements and government subsidies help de-risk critical mineral projects for financial institutions. Debt finance typically works best in long-term and fixed-price offtake agreements with creditworthy buyers.
How well positioned is Australia to be a global leader in supplying the critical minerals needed for the global transition? How can Australia balance ESG concerns with the growth in mining needed?
Australia’s rich mining heritage, alongside its close relationship with the US and other western economies are the key advantages for Australia’s critical mineral supply chains. However, new project costs and lengthy ESG approval times loom as major hurdles for Australian critical mineral projects. And these hurdles are proving significant – helping explain why the International Energy Agency (IEA) sees Australia’s share of mined lithium supply dropping from a market-leading ~35% in 2024 to ~26% in 2030.
Costs are proving even more of a disadvantage in downstream processing as any cost benefits from geology are stripped out and the lack of Australian expertise is even more pronounced. For example, new lithium chemical projects in Australia are more expensive than similar projects in South Korea and South America. This means that Australia’s lithium processing sector will struggle to be cost-competitive in the ex-China market.
Rising energy costs, particularly in east-coast Australia, loom as a further deterrent to the downstream industries. We continue to see Western Australia as the main opportunity to build out downstream capabilities. But if downstream lithium processing in Western Australia is a sign of downstream capabilities, it’s hard to see how Western Australia finds a way to reduce costs enough in coming years such that refined critical mineral supply increases materially. We would likely need to see a combination of sizable government support and strong fixed-price offtake agreements with creditworthy counterparties to feel more confident on the outlook of downstream (and upstream) critical mineral supply in Australia.
Finally, what do you think we should be on the lookout in the coming years? Key opportunities or concerns for the industry
Given the concerns of western economies to secure defence technology supply chains, the key near term opportunity to watch is government-led initiatives to source mined and refined rare earth supply. A reverse auction for a fixed amount of rare earth supply is one such pathway. Given the high creditworthiness of government counterparties and the ability for the sector to pay a premium for secure and reliable supply, Australia may see mined and refined rare earth supply increase. This could pave the way for how energy transition metals are sourced too. Government willingness to get involved and the cost premium for reliable and secure supply though both appear more limited compared to rare earths.
The main concern for Australia’s critical mineral supply chain ambitions is a further fracturing of western economy alliances. This is seen most obviously in the US, where the preference is for the US to build out energy transition and defence technology supply chains.
