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Rare earth elements: Miners need to invest now to end fossil fuel dependency

07:00, 23 June 2022

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  • Palladium
    Palladium
    2229.06 USD
    -61.6 -2.710%
  • Platinum
    Platinum
    972.98 USD
    1.62 +0.170%

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Open cut mining operation in Australia showing the pit of the mine
The top 40 mining companies need to heavily invest in expanding and developing new mines to supply more critical metals – Photo: Shutterstock

Mining companies have long been instrumental in influencing the speed and direction of the global green transition. This is due to their heavy dependence still on fossil fuels, especially coal. With a number of mines using inordinately large amounts of water, energy and fuel to run their operations, investors are concerned that they may now be pushing back the green transition by several years, if not decades. This concern is not restricted to resource usage, but also the impact of mining activities on ecologically delicate areas.

However, now more than ever, miners play an even more crucial role in the green transition, due to them being instrumental in exploring and mining rare earth minerals, or critical metals. These metals are especially key in the green transition and feature platinum group metals such as platinum and palladium amongst others. Other critical metals include lithium, cobalt, aluminium and copper.

Copper is deemed to be a critical metal due to its importance in the green transition

Why are critical metals important?

Critical metals have been defined differently for various purposes, but are generally regarded to be any metal which is rare, has a key role in the green transition, or is one with a relatively delicate supply chain. In the past few decades, metals which have more significance for the green transition have gained the most prominence as critical metals.

Lithium, cobalt, nickel and graphite are key among these, as they are paramount for both electric vehicles (EVs), as well as for energy storage. Aluminium and copper are needed for energy transmission, whereas rare earth minerals, silicon and uranium are highly useful for nuclear, solar and wind energy. Platinum group metals are also used extensively for the same.

Aside from these, critical metals are also essential in developing new technologies, especially hi-tech applications, such as electronics and national defences. Russia and South Africa are key suppliers of platinum group metals, whereas Chile and parts of Africa have abundant deposits of metals such as lithium and copper.

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Why is mining investment crucial for the green transition?

According to PwC’s recent Mine 2022 report, the net profit for the top 40 mining companies has increased approximately 127%, with their market capitalization increasing about 7%. Mining investment is absolutely crucial for the green transition, as the top 40 miners will lead the way in critical metals exploration and mining. This will help the world stay on track with net zero 2050 goals in the long run and adhere to the Paris Agreement.

The investment that mining companies allocate towards expanding existing mines and installing new mines is expected to go a long way in meeting soaring critical metals demand in the long run. Hence, responsible and sustainable exploration, production, refining and processing is considered to be a key goal for the next few years for top miners.

However, miners face a number of challenges while meeting these investment goals. These include volatile critical metal prices, as well as the time needed to finance and licence mine constructions. Increasing pressure from stakeholders to adhere to ESG goals, as well as geopolitical issues are other issues.

To combat these, mining companies are expected to re-evaluate their exposure and positioning in the critical metals supply chain and own more of the chain if possible. They can also work towards using capital strategically and revisit deal strategy in order to capture new opportunities. Building trust with various stakeholders also remains a key objective as far as ESG goals are concerned.

What is the outlook for critical metals?

In the short term, the market for critical metals is still expected to be relatively tight, as it can take a few years to expand existing mines and almost up to a decade to get a new mine up and running. Hence, until then, supply chain issues as well as a widening demand/supply gap should be expected.

In the long run, lithium is expected to start having a deficit by this year, moving steadily to material shortages by 2025, according to Macquarie Group. The company also expects lithium prices to jump between 30% and 100% in the next four years.

Credit Suisse (CS) takes a different stand though and has recently tempered down its previously dire lithium deficit predictions and now expects a more balanced lithium market for 2023 and 2024, with potential surpluses in 2025.

According to the investment bank, this is because the world has altered considerably in the last few months, with war and geopolitical concerns, denting demand considerably. On the other hand, lithium supply has picked up faster than expected, thus potentially setting the stage for a surplus in the next few years. However, the rising demand for electric vehicles also needs to be taken into account here.

According to a World Bank commodities price forecast report, copper is expected to touch about $8200 per metric ton by the end of 2023, before dipping to about $7544 in 2025 and finally stabilising around $8000 in 2035.

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