As a result of climate commitment made at United Nations Climate Change Conference (COP26) at Glasgow in November 2021 by governments across the world, the net-zero target of reducing global carbon emissions (aimed at preventing the planet from warming by more than 1.5°C) has taken centre stage as a core principle for businesses.
The decarbonisation goals for the economy, however, present an onerous challenge for the metals and mining sector, according to a report by leading consulting firm McKinsey.
According to the report, the metals and mining sector will be at the core of enabling the energy transition, as the world gears up for net zero with demand for raw materials set to soar.
The report highlights the unique challenges that the energy transition goal presents for metals and mining companies, which will require them to innovate and rebuild their growth agenda.
Strategy For Decarbonisation
The pathway to decarbonise has a number of approaches but the major benefits are centred on the use of cleaner technologies. This includes electrification of the economy as we move from fossil fuels to wind and solar power generation, battery- and fuel-cell-based electric vehicles (EVs), and hydrogen production.
Importance Of Raw Materials
Raw materials are going to be at the centre of decarbonisation efforts. The report highlights the materials critical for transition to a low-carbon economy, by technology type.
Requirements include relatively large-volume of raw materials such as Copper for electrification and Nickel for battery EVs as well as relatively rare commodities, such as Lithium and Cobalt for batteries, Tellurium for solar panels, and Neodymium for the permanent magnets used both in wind power generation and EVs. Some commodities—most notably, Steel is also expected to play an enabling role across clean technologies.
Rare Earth Metals (REE) – Major Bottleneck
REE include the 17 elements on the periodic table of chemical elements. Industrial demand for these elements is small in terms of volume but they are essential for a wide and growing array of green technology. Lanthanum for example is used in batteries for hybrid cars. Other REEs are used in magnets for electric generators in wind turbines and in coloured phosphors for energy-efficient lighting.
Though Rare-earth metals’ existing global reserves are satisfactory, a number of factors stand out.
First, these elements occur in relatively low concentrations; therefore, identifying and bringing assets to production would likely come with higher investment needs and lead times.
Second, specific elements (for example, Neodymium), which are critical for the transition; occur at very different proportions within those deposits. This makes the availability and economics of specific metals much more complex.
Third, there is a significant geographical concentration of known reserves: 40 per cent of REO-equivalent reserves are estimated to be in China. Therefore, additional geological exploration would be needed to identify other economically viable deposits in specific geographies.
Finally, in addition to the availability of raw materials, processing and separation of the specific elements is crucial. As it stands today, China leads in processing and separation capacity, as well as the technical capabilities required for REEs.
Energy transition will therefore require a regional redistribution of processing capacity and reorganisation of supply chains.
Supply Side Challenge
As the world gears up for net zero, demand for raw materials is set to soar. Metals and mining sector has a long lead-time, and is a highly capital-intensive sector. Thus with accelerating energy transition, demand would outstrip supply leading to price fly-ups and bottlenecks.
The required pace of transition means that the availability of certain raw materials will need to be scaled up within a relatively short time scale—and, in certain cases, at volumes ten times or more than the current market size—to prevent shortages and keep new-technology costs competitive.
Demand Side Challenge
Efforts at building a low-carbon economy have its own challenges. To drastically reduce emission intensity, low-carbon technologies will require higher material. For example, producing battery or fuel-cell EVs will be more materials-intensive than building an internal combustion engine (ICE) vehicle.
So What Happens Next?
The trajectory toward materials availability will not be a linear one. It is expected that there would be materials shortages, price fly-ups, and, given the inability of supply to react quickly, the need for technological innovation and substitution of certain metals (possibly at the expense of performance and cost of the end-use application).
While raw-materials needs will grow exponentially for certain metals, lead times for large-scale new greenfield assets are long (7 to 10 years) and will require significant capital investment before actual demand and price incentives are seen. At the same time, with increasingly complex (and largely lower-quality) deposits needed, miners will require significant incentive before large capital decisions are made.
A combination of technological development on the supply side and large-scale substitution and technological development on the demand side will occur. Substitution in noncritical applications will take place and new extraction and processing technologies will emerge.
Continued technological development and performance, available material alternatives and carbon-footprint implications for end-use applications, are key factors that could impact the extent of substitution for individual commodities.
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