Energy transition in agony

Lithium prices have soared by close to 500% over the past year. Stocks at the London Metals Exchange have dropped to the lowest since records began in 1997. EV prices are rising. The energy transition may have well ended before it took off.

It’s increasingly looking like we are witnessing the mother of all perfect storms. When lockdowns started spreading across the world on the heels of Covid infections demand for natural resources naturally slumped but so did production.

Then demand rebounded and it rebounded quickly while supply remained a hostage to broken supply chains and underinvestment in mining because climate change and energy transition.

Then came the energy crunch, which made electricity a lot more expensive not just for the regular household but also, and perhaps more importantly, for industrial users such as alimunium smelters, for example. Some shut down, further hitting production.

And then the war in the Ukraine prompted a frenzy of sanctions hitting Russia’s major industries including the mining industry, which supplies a solid portion of the world’s basic and precious metals. I won’t insult anyone by asking “Guess which transition needs a lot of basic and precious metals?”

According to a recent report by the Financial Times, LME inventories of aluminium, copper, nickel, and zinc have dropped by as much as 70% over the past 12 months. The reason, according to analysts, is higher energy costs that are making a lot of production unprofitable, so metalmakers are cutting or shutting down production and turning to inventories for the metals they need.

In other words, we have lower production because of higher energy costs combined with growing demand because, well, EVs and wind turbines are not the only things requiring metals.

Yet EVs and wind turbines are things requiring a lot of metals per current plans in, a totally random example, the UK and the European Union. The EU is eyeing higher wind and solar targets to reduce its use of Russian hydrocarbons. The UK plans to have 50 GW of offshore wind capacity within eight years and increase solar capacity fourfold from the current 14 GW by 2035. Would anyone care to guess how many copper or iron ore mines there are in the EU and the UK?

According to 2020 figures from Statista, the biggest copper producer in Europe, with 790,600 metric tonnes, is Russia. Poland is a distant second with output of 442,000 metric tonnes, followed by Spain with 187,710 tonnes. Since Russia’s copper is now unwanted and resented in the EU, that leaves the smaller producers if renewable developers are to rely on local production because local means secure and available.

It is quite unfortunate, then, that a megawatt of renewable power systems needs 5.5 tonnes of copper, according to the Copper Alliance. It wouldn’t have been unfortunate if renewable power systems were the only destinations for European copper. Alas, they are not. Copper is so versatile and so essential for anything with the name “electric” or “electronic” in it, it’s a miracle we haven’t run out yet.

So much for domestic production. And new mines? According to a report by Politico, some in Europe are beginning to call for more new local production of critical metals and minerals. I don’t know if the individuals doing the calling realise how futile it is after decades of politicians nurturing a growing opposition to extractive industries. They are destructive (true) for the environment, they pollute and anyway it’s cheaper to import from Russia and China.

It takes a special kind of genius to devise an elaborate though simple trap, build it and then get caught in it, which is exactly what Europe did. Yet the United States is doing its best to catch up, reaching new heights in cognitive dissonance.

The Biden administration wants an energy transition. It is willing to spend billions on it (but Congress isn’t, which is already a problem). What it doesn’t seem to want are new mines to secure the local supply of metals and minerals essential for this transition.

The Twin Metals Minnesota license revocation earlier this year is the perfect illustration of this dissonance although it is not the only one. The U.S. federal government really, really wants local supply of critical metals and minerals. Only it really, really doesn’t want to anger its core voter base, which happens to be very, very environmentally conscious. Talk about checkmating yourself.

Governments are not the only geniuses of long-term planning, however. Carmakers pouring billions into the electrification of their business are equally talented in self-sabotage. They seem to be basing their EV investment decisions entirely on government plans for EVs. If the government is determined to support the electrification of transport, then there’s no way we could fail. Alas, that’s far from true.

An Australian miner recently sent a dire warning to the car industry. Stuart Crow, chairman of Lake Resources, told the FT that “There simply isn’t going to be enough lithium on the face of the planet, regardless of who expands and who delivers, it just won’t be there. The carmakers are starting to sense that maybe the battery makers aren’t going to be able to deliver.”

Better late than never, one might say but in this case “late” might well mean “too late”, which for the purposes of the energy transition is as good as never.

Let’s recap, shall we? The prices of basic metals essential for the energy transition are soaring because of increasingly tight and still tightening supply. The tightening of supply is caused by, on the one hand, higher energy costs that are forcing the curtailment of production. On the other, there is a deeper cause and that’s insufficient investment in new supply because of growing public — and investor — hostility against the mining industry.

The tide is turning with regard to investor attitudes to mining but that’s not enough to solve the other underlying problem that I’ve already talked about: ore grades are falling due to natural depletion of resources, which means that it is now more expensive to mine a tonne of copper than it was 20 years ago, even if there was no change in energy costs. Mining a tonne of copper now simply requires a lot more energy than it did 20 years ago.

So, there are less metals and minerals that can be extracted cheaply but demand for such metals and minerals is rising, driven by government energy transition plans. And various transition proponents and analysts are forecasting investments in renewable energy needs to increase immensely if we are to hit Paris Agreement emission targets.

The cheap renewable energy myth is being busted in real time. The question now is whether those in decision-making positions would rather keep the transition on — very expensive — life support or take the realistic road and save us all a lot of financial and energy pain.