Critical raw materials – a blind spot of policymakers in the transition to net-zero

Net-zero: a paradigm shift towards a more material-intensive system

The transition to net-zero and the rollout of the associated clean technologies represent a paradigm shift from our current fuel-intensive system reliant on oil and gas to a material-intensive system that is heavily reliant on metals such as lithium, copper, cobalt, nickel and rare earth elements. Clean technologies require significantly more metals compared to conventional technologies. For example, a regular-sized electric car has a six times higher metal requirement compared to a conventional car, and an onshore wind plant needs about nine times as many metals as a gas-fired power plant of the same capacity (see figure 1).

As a result, the large-scale rollout of clean technologies will lead to a surge in demand for raw materials during the following decades. The total raw material demand in 2040 is forecasted to be approximately six times higher than in 2020. Furthermore, the demand for selected raw materials that are at the core of the different clean technologies is projected to rapidly expand compared to current levels, with lithium, cobalt and nickel demand rising by 42, 21 and 19 times, respectively.[4] This raises the question: where will all the additional raw materials come from?

The geopolitics of raw materials

Oddly, the European Union and other western developed economies, which are at the forefront of climate action, are also the most dependent on other countries to provide the necessary raw materials. To illustrate, the EU and the US rely on 98% and 80%, respectively, for their rare earth elements needs on imports.[5] On the other side, you have a few countries that dominate the supply of raw materials, primarily located in Africa, South America, South-East Asia and Oceania. Approximately 70% of all cobalt is mined in the Democratic Republic of Congo (DRC) in Africa, about 50% of all nickel is mined in Indonesia and the Philippines, 75% of all lithium is mined in Chile and Australia, and 60% of all rare earths are mined in China. Moving down to the next step of the value chain, the processing of raw materials is even more concentrated and dominated by a single country. China has almost a monopoly on a global scale, processing more than 80% of all rare earth elements, about 60% of all cobalt and lithium, and approximately 40% of copper and nickel.[6]

The current supply dynamics will remain unchanged for the coming years concerning the dominant players. It takes, on average, approximately 17 years to develop a new supply source from discovery and exploration to actual production, meaning there will be a significant time lag until additional supply becomes readily available.[7] In addition, the success rate for developing new mining is shallow, with <4% of brownfield and <0.03 % of greenfield exploration targets, making it past the prospecting and exploration phase, which represents only the initial phase in the lifecycle of a mine.[8] Thus, even if policymakers were to redirect their focus on ensuring the availability of these critical raw materials today, it would take well into the 2040 decade for additional supply to be readily available. However, the demand for these raw materials is forecasted to surge already in the coming years, leading to a supply deficit by the middle of this decade that is growing over time. For example, the demand for copper and lithium is projected to exceed the available supply by 30-40% by 2050. [9]

How should countries respond to this looming supply deficit?

The supply deficit of critical raw materials is threatening to undermine the rollout of clean technologies and hinder the accomplishment of the climate goals of the Paris Agreement. Global mining activity will have to increase drastically and in a short period of time to keep up with the unprecedented demand for raw materials. Countries have different options to position themselves regarding the supply deficit depending on whether they currently have 1) little to no local mining activity with import dependency on other countries, 2) are resource-rich with existing local mining activity, or 3) are oil and gas-rich countries.

A. Import-dependent countries with little or no local mining activity

Import-dependent countries must diversify their supply sources to minimise the supply-chain risk of relying on a limited number of suppliers. The downside of this import dependency is illustrated by the period of 2010-2011 when China cut the export of rare earth elements. Subsequently, the price for rare earth elements soared by more than 35 times, prompting countries like Japan to search for alternative sources of supply.[10]

In addition, mandating the recycling of waste products is critical to ensure a circular economy and to reduce reliance on third countries. Currently, the recycling rates for lithium and rare earth elements are negligible (<1%) due to technological constraints and limited collection rates. But after 2030, the number of electric vehicle batteries that reach the end of their life will grow exponentially, leading to massive opportunities for those who can recycle the batteries cost-competitively, in an environmentally friendly way and at scale. However, even if recycling rates were to reach 100%, this will not replace the need to find new primary supply sources.[11] Local mining projects will have to be developed to ensure a sufficient supply of raw materials, which is why increased investment in advanced exploration and development of critical raw materials Is immediately necessary. However, mining consumes vast amounts of water, is energy intensive and polluting activity that produces large amounts of waste and can have an adverse impact on local ecology and people if not managed responsibly. Today, most mining activity occurs in countries with lower ESG standards, leading to a worse ecological footprint and human rights abuses through child labour. Paradoxically, to achieve the net-zero agenda, we will have to rely on those countries to provide the critical raw materials while damaging the environment, at least in the short term. But the additional mining of raw materials should not come at the expense of the local people or the environment. Therefore, it is critical for new mining projects to take place in countries that have established proper and internationally recognized regulatory codes and abide by higher ESG standards. Critical raw materials that are produced responsibly will be in high demand as businesses are scrutinised over their supply chain, and consumers increasingly demand ethically sourced and environmentally friendly products. In the future, there will not be a single price for a raw material anymore, but rather green premiums and a spectrum of different prices depending on how ESG-conform the whole production process was.

B. Resource-rich countries with existing local mining activity

Countries that control the supply of critical raw materials will continue to benefit from the surge in demand and have gained leverage over import-dependent countries. To capture more benefits for the local economy, these countries will move downstream in the supply chain to unlock more domestic value-added activities. For example, Indonesia banned the export of nickel ore in 2020 to develop local processing activities. Furthermore, high spatial concentration of critical raw materials may lead to the formation of OPEC-like cartels such as the so-called “lithium triangle” of Chile, Argentina, and Bolivia, and might emerge in the near future.[12] The increased coordination of producing countries may lead to increased supply security but may also lead to the opposite result if supply is deliberately restricted. This would raise price levels and come at the expense of import-reliant countries and consumers.

C. Fossil fuel-rich countries

Fossil fuel-rich countries that have benefitted from our historic economic model based on oil and gas consumption will continue benefitting from their resources in the short term. The global economy will continue to rely on fossil fuels due to the supply deficit of raw materials delaying the net-zero transition. Nevertheless, as fossil fuel consumption is expected to peak in 2030, these countries will have to position themselves differently to benefit in the long term and become part of the new economy that is driven by electronification.

Raw materials like lithium, copper, cobalt, nickel and rare earth elements lie at the heart of the net-zero transition as critical inputs for clean technologies. The surge in demand for these raw materials will lead to a supply deficit that is expected to remain for the following decades, delaying climate action and undermining the achievement of the 2°C goals of the Paris Agreement. Policymakers thus need to

• facilitate the development of additional sources of primary supply through responsible mining
• establish strategic partnerships to reduce import dependencies and share risks with other import-dependent countries
• promote a circular economy and mandate recycling of products that reach their end-of-life
• build a stockpile of critical raw materials to overcome short-term supply disruptions
• reward ESG-conform producers and penalise those who are not ESG-conform
• invest in R&D to reduce the material intensity of technologies

[1] Robert Friedland (2022), Investing in African Mining Indaba

[2] Net Zero Tracker. Energy and Climate Intelligence Unit, Data-Driven EnviroLab, NewClimate Institute, Oxford Net Zero

[3] IEA (2020), Net Zero by 2050

[4] IEA (2021), The Role of Critical Minerals in Clean Energy Transitions

[5] European Commission (2020), Critical Raw Materials Resilience: Charting a Path towards greater Security and Sustainability

[6] Mining (2022), Visualizing China’s dominance in clean energy metals

[7] IEA (2021), The Role of Critical Minerals in Clean Energy Transitions

[8] CTVC (2022), Mining through the Valleys of Death

[9] IMF (2021), Metals Demand From Energy Transition May Top Current Global Supply

[10] Mancheri, et al. 2019. Effect of Chinese policies on rare earth supply chain resilience. Resources, Conservation and Recycling, Thomson Reuters (2012), Analysis: Rare earth prices to erode on fresh supply, China

[11] World Bank (2020), Minerals for Climate Action: The Mineral Intensity of the Clean Energy Transition

[12] Financial Times (2022), Indonesia considers Opec-style cartel for battery metals