THE ENERGY TRANSITION AND THE RISK OF RESOURCE NATIONALISM


Some countries have a stranglehold on the materials the world needs to build a low- carbon economy.


The energy transition to a low-carbon world is mining-intensive and vulnerable to resource nationalism. To achieve net- zero emissions by 2050, the pivot toward curbing greenhouse gases will spur unprecedented demand for some of the most critical materials used in renewable energy generation and storage. From solar panels to wind turbines, battery storage, electric vehicles and electricity cables, green technologies and infrastructure all rely heavily on different sets of minerals and metals. To keep global warming under 2 degrees Celsius, graphite, lithium and cobalt production will need to rise more than 450 percent by 2050 from 2018 levels – and that is just to meet demand from energy storage technologies.


By 2030, at least 300 new mines – for materials like cobalt, copper, graphite, lithium, nickel, rare earth elements (RREs) and vanadium – will need to be brought onstream. That is no easy task, especially given the time lag between committing the capital, developing the mine and starting production (if commercial discoveries have been made), which can easily span 10 years or longer.


Concerns about potential supply shortages have begun to emerge. One study warned of a chronic gap between worldwide copper supply and demand that could open up by the middle of this decade, causing severe consequences across the global economy and adverse effects on the timing of net-zero targets.


However, most studies on the outlook for minerals and metals supplies typically assume that the status quo in the industry’s structure will remain in place and the risk of significant disruptions to that structure has


been largely overlooked. When a natural resource gains greater strategic importance and its value increases accordingly, it attracts state intervention and control.


That can take different forms – from higher taxes to creating state-owned enterprises with equity participation in various projects, export controls and even nationalization. Such a rise in resource nationalism will have significant consequences on the pace and scale of investment, security of supply and prices. That will increase the cost of the energy transition notably and risk delaying it.


PROJECTED SHORTFALL OF CRITICAL INPUTS Given the massive projected increase in metals consumption through 2050 under a net-zero scenario, the International Monetary Fund (IMF) fears that current production growth rates of metals such as graphite, cobalt, vanadium and nickel are inadequate, resulting in a more than two-thirds gap versus demand. The shortfall in copper, lithium and platinum is expected to vary between 30 percent and 40 percent relative to demand. Because of the shortfall, “prices could reach historical peaks for an unprecedented length of time,” the fund warned.


Higher prices should spur more investment in the sector, and accordingly, the supply- demand gap would dissipate over time. That is true in market-based economies where the resources are available and accessible. In practice, several problems can hinder an efficient market response.


Having sufficient resources alone is not enough to determine how well production will perform. Venezuela sits on the largest proven oil reserves in the world but only ranks 25 in production. That has been due to the lack of investment following years of adverse government policies, then sanctions imposed in more recent years.


Before committing their capital, investors consider a combination of factors, especially when it comes to capital- intensive projects that require significant upfront financing, entail geological risk and have a long payback period. These features are typical of extractive industries like mining, oil and gas. Resource availability is only one factor that goes into assessing how attractive an investment is. Other essential variables include costs and infrastructure availability, as well as license and contractual terms. The fiscal regime and political risk are especially important.


13 | ADMISI - The Ghost In The Machine | Q2 Edition 2023


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