A Wild West for minerals?

The commodity cycle is changing. After a decade, commodity traders are making more money trading metals and minerals than oil. A “commodity transition”, not just an energy transition, is underway, driven in part by the push towards electric vehicles (EVs). The minerals that will support a low-carbon future will impact the commodities supply chain widely. Will there be a mad rush to secure minerals? Are there better alternatives for long-term resource security?

The projected increase in EVs — 3 million today; 40 million in 2030 — will curb oil consumption by only 1 million barrels per day. The real implication will be for minerals used in EV batteries. Cobalt demand could rise five-fold. Glencore is doubling production by 2020, hoping to corner 40 per cent of the market. Five times more copper is needed for EVs and charging infrastructure than in internal combustion engine vehicles. Additional copper demand could be 400,000 tonnes. In nickel manganese cobalt batteries, there is growing preference for more nickel and less cobalt, which could result in a rapidly tightening market. Trafigura, another commodities trader, is betting on nickel.

In its pioneering study, in 2016 CEEW had identified 12 most critical minerals (high economic importance and high supply risk) for India’s manufacturing growth*. For seven of these — and nearly half of 49 minerals analysed — India is entirely import-dependent. The scenario is now more challenging. India wants to go big on EVs and is seeking significant investment in battery manufacturing. CEEW scholars estimate that by 2030 India would need EV battery capacity of 400 gigawatthours (GWh), five times global EV battery production today**. That translates into 40,000 tonnes of lithium in 2030 for India (current global production: 32,000 tonnes) and 131,000 tonnes of cobalt (current global production: 124,000 tonnes).

Facing real or perceived mineral insecurity, countries and companies have four (imperfect) options: Resource rush, supply chains, sustainable design, and trade agreements.

Firms are rushing to buy mines overseas or secure minerals supply contracts. Although lithium deposits are 3,000 times current annual output, there are fears that political motives would interfere with supply. Chinese companies produce 77 per cent of refined cobalt, and could control 90 per cent soon. Chinese manufacturers control 50-77 per cent of the market for cathode and anode materials, electrolyte solutions, and separators used in lithium-ion batteries.

This is disconcerting. The strategy to secure minerals is intimately linked to government mandates/standards to create exclusive markets for Chinese battery and EV manufacturers. China plans 150 gWh production capacity in threeto-four years (Tesla is building only 35 gWh capacity). The State Reserve Bureau now has 5,000 tonnes of cobalt in reserve (15 days’ global supply; against just three days’ reserves of global crude oil supply).

Analysts contend that no carmaker has proper longterm contracts for supply of lithium. So, firms are now trying to secure their supply chains — with varying success. Chinese auto firms (Great Wall Motor), battery makers (CATL), and miners (Gangfeng Lithium) have secured multi-year contracts or purchased controlling stakes in lithium mines in Argentina, Australia and Quebec, Canada.

BMW is pursuing long-term supplies of lithium and cobalt. Tesla is negotiating with Chile’s SQM, one of the world’s largest lithium producers. Toyota recently bought 15 per cent of an Australian company that mines lithium in Argentina, and owns a stake in Japan’s largest nickel smelter.

While Volkswagen has struggled to find suppliers for five years worth of cobalt, China dominates the supply chain, locking in supplies from Glencore for half of global cobalt production until 2020. China Molybdenum also bought a $2.65 billion mine in the Democratic Republic of Congo, which has the largest cobalt reserves.

Fluctuating prices mean there are risks in long-term contracts. When rare earths’ prices fell in 2015, the only functioning US mine went bankrupt. To become more price-competitive, Japanese companies (Ube, Sumitomo, and Central Glass) are investing in battery production in other Asian countries. Overall, the scenario remains uncertain. Firms risk oscillating between mitigating geopolitical worries and foolhardy longterm investments.

A third alternative is to reduce mineral demand altogether by adopting more sustainable designs and recycling. Large EVs emit more greenhouse gases than smaller ICE vehicles over the lifecycle. Average EV batteries could double in capacity to 40 kWh by 2025, pushed by an obsession with increasing range (600km-plus) when most journeys are under 100km/day. Less than 5 per cent of Li-ion batteries are recycled in Europe; almost none in China. Smaller batteries and mandated recycling could temper concerns around mineral insecurity.

The fourth route — preferential trade agreements with mineral-rich countries — is only as good as governance. Ilaria Espa of the World Trade Institute explains that multilateral arrangements are needed because there are few bilateral agreements on minerals between countries that have imposed export restrictions (China) and major importing regions (EU, India, etc.). WTO members could be mandated to notify restrictions on mineral exports before they come into force. Combined with centralised monitoring, this could increase transparency. Negotiations are needed to increase predictability of how export duties would be applied on specific minerals. Mineral exporters should have flexibility to impose restrictions only for genuine reasons (environmental protection), not to protect domestic industry.

The above are imperfect options. For its energy and commodities transition, India has to balance the benefits and risks of running headlong into a resource rush, or locking in long-term contracts. A Wild West for minerals could be avoided if sustainable designs and robust trade arrangements were pursued.

*“Critical Non-Fuel Mineral Resources for India’s Manufacturing Sector”, Vaibhav Gupta, Tirtha Biswas, and Karthik Ganeshan, July 2016

**“Getting charged up”, Tirtha Biswas and Neeraj Kuldeep, The Hindu, August 19, 2017

The writer is CEO, Council on Energy, Environment and Water (http://ceew.in) Twitter: @GhoshArunabha; @CEEWIndia