Three billion tons: this is how much metals and minerals the energy transition will require, according to a World Bank report. Demand for some of these, such as copper, lithium, cobalt, and graphite, is set to increase 500 percent by 2050, according to the same report. And the market for some of them—namely copper—is already near a deficit.
Copper prices are close to record highs last seen in 2011, and one analyst at least expects demand to exceed supply before this year’s end. Demand, Natalie Scott-Gray from StoneX said last month, as quoted by Mining.com, will rise by 5 percent this year while supply will only inch up by 2.3 percent. The longer-term problem is that additional supply takes time to come.
“We see the use of electric vehicles, wind farms and solar requires up to five times the amount of copper,” Jeremy Weir, chief executive of Trafigura, said at this year’s edition of CERAWeek, as quoted by Reuters. “You can’t turn on the switch and produce more copper.”
Weir added that copper mines take between five and ten years to develop, which means a tighter supply in the observable future. The situation is similar to other minerals that are essential for the energy transition. Cobalt prices are on the rise, too, at the moment, because of expectations that supply will tighten due to rising demand. And Tesla’s Elon Musk recently inked a deal to make the company a technical adviser at the Goro mine in New Caledonia to secure its long-term nickel supply—another key battery metal.
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A 500-percent increase in demand for anything is certainly good news for investors in that thing, so bullish times are ahead for metals and minerals investors as the prices of base metals such as copper and nickel rise. But as copper and nickel prices rise, so will the price of the products made with them, notably EVs, on which much of the energy transition hinges. EVs are being touted as increasingly affordable as carmakers and battery makers continually reduce production costs. But if the price of any battery components jumps significantly due to a shortage, these production cost cuts will be wiped out.
The root of what could become a serious price problem with base metals lies in the past: for years, the industry has been plagued by underinvestment due to weak base metal prices, and these weak metal prices were the result of abundant supply because the demand drivers were always the same: manufacturing, construction, telecoms, and power utilities for copper, and stainless steel production and construction for nickel.
Right now, just 4 percent of the global demand for nickel comes from the electric vehicle industry, while 70 percent comes from the stainless steel production industry. But the forecast boom in EV adoption will lead to an increase in the share of demands from 4 to 10 percent by next year and further to 20 percent by 2030. This is a very sharp and very quick increase that will inevitably cause price spikes as production has yet to catch up.
The outlook is even more bullish for copper. Since 1990, there have been as many as 224 major new discoveries of copper deposits, according to a report by S&P Global Market Intelligence cited in a BFI Capital Group overview of the energy transition. Yet only 16 of these discoveries were made in the last ten years, with only one made since 2015. This means a depressed exploration environment that has led to a decline in future supply, which means a shortage is looming large on the horizon.
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Speaking of depressed exploration and underinvestment, the oil market is also facing a shortage despite the commodity’s fall from grace into deep disgrace as the ultimate reason for the sorry state in which the Earth’s atmosphere appears to be. Two price crashes in the past ten years caused shrinking exploration, with the second crisis also accompanied by a pandemic that led to a historic demand collapse, further reducing the industry’s appetite for new exploration. The result: in just five years, the world will need 10 million bpd more oil than it has, according to French Total.
Total is not the only one warning of a shortage. The American Petroleum Institute recently said that the combination of underinvestment and natural depletion will result in a shortage as soon as next year. Of course, the API is an industry organization, so one would expect such a warning from it, but the makings of a shortage are easy to see from a distance, too. Everyone in oil cut their investments in new exploration during the 2014 and the 2020 crisis. Last year many even had to reduce existing production because of the collapse in demand.
Now, with the prospects for oil grimmer than before because of the energy transition, many, notably Big Oil majors, are planning to continue reducing their production. Demand, meanwhile, is not declining as fast as energy transition advocates might want it to decline, especially in developing nations that are heavily dependent on fossil fuels. India, one of the biggest drivers of global oil demand, has already warned that the OPEC+ decision to keep production caps in place will hurt its economic recovery.
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So, what we have to look forward to in the coming decade or so may well be more expensive EVs and more expensive solar and wind farms, since copper features heavily in these renewable energy systems, and, ironically, more expensive oil.
By Irina Slav for Oilprice.com
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