Energy Transition: Lithium and Copper standing out?

“The future of mobility is electric, and we must invest in the technologies and infrastructure that will make this transition possible.”  ~ Ratan Tata.

Elon Musk referred to these elements as the “new oil,” highlighting their “insane” costs. The White House offered subsidies to increase supply, while European leaders also pledged financial support for related projects. Just a few months ago, concerns about shortages of metals like Lithium, Copper, Nickel, and Cobalt essential for battery production in the energy transition, led to rising prices and widespread apprehension.

Countries around the globe are investing heavily in the extraction of lithium to support battery production for electric vehicles (EVs) and utility-scale storage. This has led to the enormous growth of mining projects in lithium hubs, such as the Lithium Triangle in South America (Chile, Argentina, & Bolivia), Australia, and Africa as well. It has also encouraged greater exploration in less prolific areas, as energy companies look to strengthen their supply chains through domestic lithium production. In the U.S., Arkansas is rapidly becoming a major lithium hub, with other lithium states expected to emerge following greater exploration activities.

At the same time, world’s second-largest miner Rio Tinto will acquire U.S. lithium producer Arcadium for $6.7 billion. Rio Tinto will become one of the largest suppliers of lithium, trailing only after Albemarle and SQM.

As per a McKinsey report, the global metals and mining industry is entering a new era. Historically, the industry has been driven by economic growth and the development of the middle class, resulting in major demand growth for materials such as steel, aluminium, and coal. While 80 percent of the industry today primarily consists of five materials—steel, coal, gold, copper, and aluminium—the landscape is rapidly changing as a result of the energy transition.

The past two to three years have posed some challenges for the materials industry, with high price volatility driven by increased supply chain disruptions and volatility in energy prices, among other factors. While the industry has experienced previous cycles of boom and bust, these recent fluctuations are unprecedented in scale.

Lithium is ramping up faster in US and Copper in Argentina:

For Lithium, the difference is driven by assets funded by Australian and US investors coming online faster than expected, as well as an unanticipated scale-up of Lepidolite assets in China in response to elevated lithium prices. And for nickel, the ramp-up stems almost solely from integrated high-pressure acid leach (HPAL) laterite assets in Indonesia.

Based on recent discoveries, the U.S. could be well on its way to lithium independence. Last September, a group of scientists funded by Lithium Americas Corporation reported that the McDermitt Caldera, a volcanic crater on the Nevada-Oregon border, holds between 20 and 40 million metric tonnes of lithium deposits, which is almost double that found in Bolivia, which forms part of the lithium triangle.

The DoE had announced that it had confirmed another major lithium deposit, under California’s Salton Sea. It stated that there were around 3,400 kilotons of lithium, which would be enough for over 375 million EV batteries. This is well above the 14 million metric tonnes previously mapped by the U.S. Geological Survey.

While the recent lithium discoveries in the U.S. are significant, the country still has limited capabilities to extract, refine, and produce domestic lithium.

Argentina’s growing role in the copper market is crucial for meeting the increasing global demand for copper, driven by the energy transition and the rise of electric vehicles.

Emerging Producer: Although Argentina currently produces minimal copper, it shares rich geological features with Chile, the world’s top copper exporter.

Future Growth: With several advanced mining projects in the pipeline, Argentina is poised to become a major copper supplier by 2035, potentially producing over one million metric tons annually.

BHP has recently made a significant investment close to USD $4 Billion USD in Argentina’s copper sector very recently, marking its first venture into the country in two decades.

 The highest relative growth will come from Copper and Lithium:

Demand projections remain strong from now until 2035. In fact, except for steel and thermal coal, demand is expected to outpace absolute historical growth in the coming decade compared with the previous decade for all materials considered, with lithium and copper in particular standing out.

Nickel and rare earth elements (REEs) are also projected to grow faster than in the previous decade, yet outlooks for both have been adjusted downward over the past nine months as demand from the automotive sector is shifting away from high-nickel batteries and REE-intensive electric-vehicle motors.

While most metals contend with annual demand growth of 2% to 3%, cobalt and lithium have enjoyed consumption growth of 10% to 20% per year. From the demand side, critical minerals are the envy of the commodities industry. Supply, though, has also expanded at breakneck speeds.

Rare Earth (REE), Lithium, Uranium, Iridium, and Copper may face shortages:

Recent changes in supply and demand have altered the projected supply–demand gap, especially after 2030. In the past 24 months, both nickel and cobalt have moved from expected undersupply to oversupply, as an example.

That said, shortages are still anticipated for several materials key to the energy transition, in particular REEs, lithium, sulphur, uranium, iridium, and copper.

For materials where timelines for project development are fairly limited (in some cases less than five years), the supply–demand gap is likely to close by further scaling up supply once demand signals become strong enough. This is the case for uranium, for which scaling challenges depend mainly on the uncertain future of nuclear power as opposed to the scarcity of reserves or a sufficient number of potential projects. A similar example is seen in Lithium, where reserves are abundant, and mines have relatively short development timelines.

For other materials, the supply–demand gap is less likely to close through the accelerated scale-up of supply because of long project timelines or limited high-quality reserves and projects. In such cases, given that supply and demand must match, demand adaptation or reduction is expected to take place to balance the market. The most notable example in this category is copper. Price increases will likely be required to incentivize sufficient supply to come online.

Since 2022, Lithium prices have dropped by approximately 80 percent, and prices for nickel have dropped by approximately 20 percent per tonne. These decreases represent a “normalization” rather than a drastic shift in industry dynamics, as prices moved closer to typical production costs. Cobalt, long considered a commodity at risk of perennial shortages, is now so abundant that its price is hovering near a 20-year low.

As per McKinsey, to incentivize sufficient supply, nickel prices would need to increase by around 5 percent per ton increase, assuming that the most economical projects would be prioritized and delivered on time. For Lithium and Copper, the pipeline of announced projects is smaller, and the demand increase is higher. Therefore, a higher price increase would be needed to incentivize sufficient supply to meet demand. For copper, an approximate 20 percent increase from current prices would be needed, and for lithium, the approximate required price increase is 30 percent, provided all announced projects come online.

Low prices are no guarantee of security of supply. More than ever, China dominates production of lithium, reinforcing its enormous influence on the batteries essential for electric vehicles and other gadgets. Worse, prices have fallen so low that non-Chinese miners would struggle to make a profit, reducing the incentive for Western investors to build their own sources.