New superpowers as the world transitions to clean energy

In mid-February, when the risk of a Russian-Ukrainian conflict became clear, the tycoon Alisher Usmanov accelerated the construction of the Udokan copper mine in Siberia. This work requires leveling a mountain top. Meanwhile, in the Arctic tundra, mining company Kaz Minerals has mobilized funds for the Baimskaya mine. The mine is in such a remote location that it requires its own port, icebreaker and floating nuclear power plant.

For many years, these projects were stalled due to excessive costs. But demand for copper is forecast to skyrocket as it’s used in everything from the power grid to turbine engines. The value of this metal increases and causes the mines to accelerate as well.

Copper prices are still rising, but projects are struggling. Insiders said they lacked important imported equipment due to the blockade of the West. They are short of money from Russian banks, who are already on the blacklist.

Mr. Usmanov also faces sanctions. “We are doing everything we can to ensure business continuity,” a Udokan spokesman said. However, if the mine starts operating this year as planned, it is unlikely to find buyers. Foreigners, even Chinese, are avoiding Russian products.

The International Energy Agency (IEA) forecasts wind and solar energy could account for 70% of electricity generation by 2050, up from 9% in 2020. That leads to huge demand for metals like cobalt, copper and nickel, which are crucial in the technology underpinning electric cars to renewable energy projects.

The IEA estimates the market size for these metals will increase nearly sevenfold by 2030. Like fossil fuel reserves, they are unevenly distributed. While some countries do not have them, others are fortunate to have large reserves.

This metal rush will not be as big as the oil and gas boom after World War II. In that period, the once marginal economies of the Middle East transformed into super-rich oil and gas nations. From 1970 to 1980, the GDP per capita of Qatar and Saudi Arabia increased 12 and 18 times, respectively.

However, this transformation will also bring prosperity to “green materials superpowers” countries. The Economist It is estimated that the group could generate more than $1.2 trillion in annual revenue from clean energy-related metals by 2040.

To recognize winners and losers, The Economist develop a scenario of using 10 “energy-related” materials by 2040, assuming global warming by 2100 remains below 2^oC.

Based on data from multiple sources, they forecast demand and sales for three fossil fuels (oil, gas, coal) and seven metals (aluminum, cobalt, copper, lithium, nickel, silver, and zinc). ). They assume prices remain as high as they are today and that the producer’s market share in 2040 corresponds to the share of available reserves.

As a result, they found that by 2040, the world will be less dependent on energy-related resources than it is today. This is largely due to the fact that wind and sun, future sources of energy, are free.

Total spending on these 10 materials will fall to 3.4% of global GDP, from 5.8% in 2021. Fossil fuel spending, relative to global GDP, has halved. Sales from green metals remained low, but increased from 0.5% to 0.7% of GDP.

Manufacturers are gradually decreasing in volume and divided into three groups based on revenue. The first group consists of the winners – the green superpowers. In particular, Australia has a lot of metals on the list. Chile is home to 42% of the world’s lithium reserves and a quarter of its copper reserves, most of which are located in the Atacama Desert.

Along with that, Congo has 46% of the global cobalt reserves (and produces 70% of the world’s production today). China is home to aluminum, copper and lithium. Poorer countries in Asia and Latin America may also be somewhat lucky. Indonesia is located right in the mountains with nickel. Peru holds almost a quarter of the world’s silver.

The second group includes countries where revenues are flat or slightly down. They include members of OPEC such as Iran, Iraq and Saudi Arabia and Russia. Despite falling oil revenues, profits will increase from 45% today to 57% by 2040. Other countries, such as the US, Brazil and Canada, lose fossil fuel income but can exploit it. huge mineral deposits.

Oil countries with high production costs lose the most. Many oil-rich countries in North Africa (Algeria, Egypt), Sub-Saharan Africa (Angola, Nigeria) and Europe (UK, Norway) saw revenue declines. Small countries like South Sudan, Timor Leste and Trinidad were hit hard. Some Gulf countries, such as Bahrain and Qatar, also saw revenue reductions of one-fifth or more.

But what can prevent material superpowers from appearing? The key point is capital. The IEA estimates that large mines have come online over the past decade, taking an average of 16 years to build. So, to meet the demand in 2040, the industry has to launch new projects now.

Julian Kettle, Vice President of Metals and Mining at Wood Mackenzie, calculates that the world will have to spend $2 trillion on green metal exploration and production by 2040. Recent projects show mining alone enough copper and nickel requires an investment capital of 250-350 billion USD by 2030.

Finding funding is not easy as many miners were hit by the raw material price crash in 2010. Liberum Capital calculates that the cost of copper exploration and production has halved since 2014, to $14 billion. . But the proceeds are now flowing into investors’ pockets instead of opening the project. “Growth in supply has become almost nonsense,” said Stephen Gill, expert at Pala Investments.

Only China spends so much. In Kolwezi, in the Congo’s cobalt belt, barefoot children shout “ni hao” (hello) when they meet all foreigners. China acquires most of the major commercial mines. Glencore, a Swiss multinational mining and trading company, is the only Western company with a strong position. In Indonesia, Chinese miners are clearing rainforests to mine nickel.

Exhausting the cost of capital is the result of three problems: limited mining technology capacity, diminishing return on investment, and increased political risk. Lack of capital can be overcome by calling for manufacturers to link vertically instead of just relying on traditional investors. For example, Tesla promised to buy future nickel production from mines in Australia, Minnesota and New Caledonia. Private equity firms and state-backed corporations tasked with securing supply can also invest.

The next problem is that the quality of mineral deposits is decreasing day by day. Udokan says it is the last potential mine with copper content above 1% of rock. The average of the Chilean dong has fallen by 30% over the past 15 years, to 0.7%. Lower levels are driving up mining and processing costs. “We now use 16 times as much energy to make 0.4536 kilograms (1 pound) of copper as we did 100 years ago,” Cutifani said.

Innovation can be helpful. Last year, BHP and Equinor (Norway), invested in an artificial intelligence startup. The company sifted through 20 million pages of scientific and state archives to locate new deposits. The world’s 67,000 km of mid-sea ridges contain a lot of copper, cobalt and other minerals. This could also help Fiji (8%) and Norway (5.5%) hold the most economically advantageous rights to those ridges.

However, innovation also makes future returns less certain. The significantly high prices that miners need to invest will also encourage large customers to look for alternatives to the favored metals. Tesla’s batteries have less than 5% cobalt, down to a fraction just a few years ago. Innovation can also facilitate recycling. By 2040, the IEA estimates, extracting cobalt from old batteries could help meet 10% of total demand.

And finally, the biggest risk comes from politics. Mining has the potential to make some poor countries rich overnight. High prices destabilize many countries. Rival factions vie for control of resources, which fuel inequality and conflict.

Large inflows of USD capital depreciate the local currency, which forces exporters to death. Debt piled up during a boom can cause a financial crisis. Take Nigeria as an example. In 1965, the country exported 10 different materials, from cocoa to tin. And two decades after the discovery of oil, it accounted for 97 percent of the country’s merchandise exports, and contributed to political instability.

What is worrying now is that history is repeating itself. Some tension emerges. Rio Tinto could restart the long-stuck Mongolian project only after agreeing to clear a $2.4 billion loan to the government. Peru’s new left-wing president is weighing higher taxes as one of the country’s largest copper mines has been blocked for weeks by locals demanding a split of the profits. Chile is debating the nationalization of copper and lithium as it implements a new constitution.

Until now, the metal’s price appreciation had prevented several Western mining companies from reaching frontiers that were once considered quite dangerous to explore. On March 20, Barrick Gold (Canada), signed a contract to invest 10 billion USD in a copper mine on Pakistan’s border with Iran and Afghanistan. BHP returns to Africa with investment in Tanzania.

But the price may not be high enough yet. Last year, Ivan Glasenberg, owner of Glencore, said copper could have to hit $15,000 a ton, up from a record $10,000 to encourage new supply. However, a vicious circle also hangs ahead. That is, the higher the price, the more likely it is to reduce demand, or make local politics more unstable. It could also bring investment to a halt again.

Session An (According to The Economist)