The growth in demand for minerals and materials needed for the energy transition is putting a strain on supply. Mining and processing are the two key bottlenecks. Dolf Gielen, Martina Lyons, Francisco Boshell and Peter Chawah at IRENA summarise the multiple challenges. New capacity is not the only problem: the geographical concentration of where the mining and, in particular, the processing is being done is the primary risk. China’s dominance in processing means economic or geopolitical shocks can disrupt supply. Long term investment needs fair long term prices, and that means international cooperation. Environmental and social concerns have to be addressed, too. Innovation is an important way to ease, or even radically change, demand for key materials. The authors warn that there will be no “one fits all” policy solution.

The world needs an energy transition. This transition is based on new energy technologies that require materials and components with specific engineering properties. Rare earth elements (REEs) are needed for permanent magnets in wind technologies and electric vehicles (EVs), copper is needed for electricity grids, while lithium, cobalt, nickel, and manganese are essential for batteries.

Rising demand means rising prices

The prices of some of these materials have risen considerably in the past couple of months. For example, lithium carbonate prices have quadrupled in 2021. Also copper, nickel and certain REEs such as neodymium and dysprosium have seen considerable price increases.

This happens at a time of high inflation, partially driven by high energy prices. The production of these materials requires significant amounts of energy and this explains part of the price increase. But it is a fact that demand for critical materials rises very fast while supply is lagging, and this scarcity is the main driver for higher prices.

Notably, the rapid growth of electromobility and the related demand for batteries, permanent magnets and cabling is new. Global battery manufacturing capacity is projected to increase fourfold between 2021 and 2025, so battery materials demand will rise accordingly (Figure 1). Analysis for individual minerals and metals shows that the mining projects that are likely to come onstream cannot match this demand.

Supply will rise

However the pipeline of mining projects is long, and higher prices will result in more supply. The question is whether this will happen fast enough as the development of mines often takes many years. At the same time, higher prices will entice existing mines to debottleneck and raise production, which may offer sufficient respite. There is no reason for scaremongering: even a few mines can make a big difference to balance supply and demand as the quantities that are consumed worldwide are often small in absolute terms.

Supply risk: geographical concentration is a concern

A second concern is the concentration of certain mining activities and certain materials processing activities. On the mining side, the concentration of cobalt mining in the Democratic Republic of Congo is a well-known fact. Then the processing of critical materials is across the board concentrated in China (Figure 2).

One important explanation is that China is the largest market for these materials, which creates economies of scale. But also in China, as elsewhere, critical materials are high on the strategic agenda. A difference is that the Chinese government has supported the development of these processing industries since the 1990s.

However, a concentration of supply in a single country creates supply risk, as witnessed during the Covid crisis. Therefore many consumers are looking at how to diversify and derisk their supply chains. The graph illustrates that a focus on mining alone is not enough. It is also the processing stage that warrants attention.

And this may extend beyond the materials. For example, the production of high-performance permanent magnets is concentrated in China as is the production of solar panels. The case of solar panels and the attempt to tackle the Chinese dominance in Europe and the United States in recent years has shown that it is not easy to translate political ambitions into effective trade policies. International collaboration will be needed to find mutually agreeable solutions for sustainable supply chains that can support global energy transition. Storing strategic metals and minerals may not necessarily diminish supply chain risks.

Environmental concerns

Environmental and Social Governance (ESG) aspects also play an increasing role. Zero carbon mining as well as other environmental and social aspects require scrutiny. Consumers want to know how the materials they consume are sourced. Better governance of new mining projects is needed and local benefits must be created. Mining companies must be held accountable, green and sustainable mining must be standardised and certified.

Countries are trying to diversify and grow supply

Therefore many countries are trying to diversify and grow supply. Companies are also trying to ascertain supply. Car companies and battery manufacturers are increasingly paying attention to the critical materials supply to ensure smooth operations going forward. Providing demand risk guarantees and favorable financing conditions is part of the effort.

Innovation

Growing primary minerals supply is part of the solution. But more can be done. Innovation can reduce demand growth substantially. Batteries provide an example: whereas nickel-manganese-cobalt cathodes were projected as the dominant technology, recent months have seen a rapid shift towards lithium iron phosphate cathodes (LFP). Better battery design has helped to overcome many of the LFP technical disadvantages.

Similar trends can be discerned for permanent magnets. Such magnets are used for EVs and wind turbines. Today’s sintered magnets require significant amounts of scarce REEs. New magnets and new processing technologies are being developed that can reduce or even eliminate the demand for critical REEs such as dysprosium. Moreover wind turbines and EVs can be designed to avoid critical materials. But this design choice has technical disadvantages, such as a reduced drive range.

Mining risks

Adequate natural mineral resources exist. But mining operations are often controversial and the development of a mine may take several years. The recent cancellation of the Rio Tinto Jadar project in Serbia is an example. The opposition of the local community and environmental concerns play a role.

Also, mining companies are often hesitant to invest in the light of minerals and metals prices that have fluctuated strongly for decades. Today’s high prices may result in a flurry of new mine developments and a subsequent price collapse. A period of high rare earth prices 17 years ago resulted in 400 mine developments but only one project made it to realisation when prices collapsed again.

Strategic stockpiling

Strategic stockpiling has been suggested as a solution. This idea is not new, for example the IEA is mandated to oversee international oil stockpiles and coordinates their release in times of shortages. The US government had strategic metals stockpiles in the past but decided to abolish most, as did Japan with its stockpiles of strategic materials.

The concept ignores the fact that demand for critical materials is increasing at a very fast rate. The problem is that building such stockpiles may take many years, or it will distort the market even further. Stockpiles do not solve the issue of accelerated mining growth. Also the geopolitical issue is not with the mineral resources but rather with the processing. The majority of permanent magnets is produced in China, so stockpiling of REEs will thus not eliminate supply risks elsewhere.

No “one fits all” policy solution

All critical materials are different, there will be no “one fits all” policy solution. For example IRENA has prepared a deep dive for lithium. This case study shows that the resource is widely distributed, but new mining projects on the books do not tally with the projected battery demand growth.

Also quality control is an important factor that may delay demand growth, as only part of lithium that is produced is battery grade. One type of battery requires lithium carbonate while another type requires lithium hydroxide. The rapid shifts in battery technology create investment uncertainty. Finally the processing is concentrated in China so new mining alone will not add to higher supply security.

There is a role for governments. But this should be measured and limited to supply security aspects. The top priority is the supply of sufficient critical materials to ensure the success of the energy transition. It makes sense to have a long view and try to reduce or eliminate demand growth through R&D and innovation. Short term new battery materials and new permanent magnets seem critical to ensure the success of the energy transition.

Europe has established the European Raw Materials Alliance (ERMA). The European Commission Joint Research Centre (JRC) has issued many studies on critical materials. A European list of 30 critical raw materials exists.

In the United States the former President declared a National Emergency to expand the domestic mining industry, support mining jobs, alleviate unnecessary permitting delays and reduce the United States’ dependence on China for critical minerals (with 35 identified chemical elements). The new administration has directed a whole-of-government approach to assessing vulnerabilities in, and strengthening the resilience of, critical supply chains including minerals, and initial efforts are focused on REE.

Other major consumers such as China and Japan have also put policies in place. Meanwhile the countries that hold the natural resources see an economic opportunity. International cooperation will be needed and fair long-term prices and demand certainty will be needed to convince suppliers to invest in long term mining. The environmental and social concerns have to be addressed in parallel. Also focus should not be on mining alone: processing seems a higher priority.

The 12^th IRENA Assembly in January 2022 and subsequent discussions have resulted in a strong mandate for the Agency to deepen its engagement on this topic. Following the consultations with member countries, IRENA will continue to expand its observatory for critical materials and facilitate dialogue among its 167 members including the European Union to foster the nexus between critical materials and the energy transition.

To do so, IRENA will collaborate and explore complementarities with other international organizations such as the World Bank, JRC, IEA, industry associations and other stakeholders.

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Dolf Gielen is the Director of the Innovation and Technology Center in Bonn, IRENA

Martina Lyons is an Associate Programme Officer, Innovation and end-use sectors, at IRENA

Francisco Boshell is an Analyst at IRENA

Peter Chawah is an Energy Innovation Associate Intern at IRENA