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June 20, 2024
PI Global Investments

Before the white gold rush

In the next decade, demand is set to rocket for critical materials like lithium, cobalt, nickel and rare earth metals, all of which are needed for electric vehicle batteries and renewable energy technologies. Jenny Messenger looks at how banks, corporates and governments worldwide are responding to the need for financing as the sector develops.


As the clean energy transition gathers speed, the world’s manufacturing nations are gearing up to extract and refine critical metals and minerals on their own turf, presenting big opportunities for profit.

Battery metals – like lithium, nickel, cobalt and graphite – as well as rare earth elements are moving from the periphery to centre stage, with their availability cited as a vital factor in how fast humanity is able to decarbonise.

In Portugal, Savannah’s Barroso mine is expected to produce enough lithium for 500,000 electric vehicle (EV) battery packs annually, while oil major Exxon Mobil is making a move into extracting the metal – often dubbed white gold – from saltwater reservoirs in Arkansas.

And in a promotional video for renewable energy producer Vulcan Energy, racing driver-turned-entrepreneur Nico Rosberg narrates the company’s plans to extract 40,000 tonnes of zero-carbon lithium from Germany’s Upper Rhine Valley every year.

Between 2017 and 2022, the energy sector drove a tripling in overall demand for lithium, while demand for cobalt and nickel shot up by 70% and 40% respectively, the International Energy Agency (IEA) says in its Critical Minerals Market Review 2023.

According to the IEA’s latest projections, the amount of lithium needed for EVs alone is set to jump from 69.8 kilotonnes (kt) to 1,039.5 kt in 2050.

Nickel demand is expected to grow by 2,946.6 kt in the same time frame – again, just for EVs, which need six times the minerals of a car with an internal combustion engine.

These forecasts come from the IEA’s announced pledges scenario, which assumes all current net-zero commitments and climate pledges will be met. The quantities are lower under the IEA’s stated policies scenario, which reflects actual policies worldwide, but even then almost five times more lithium would still be needed.

Under the IEA’s net-zero emissions by 2050 scenario, overall demand for critical minerals will increase by three-and-a-half times by 2030, reaching 30 million tonnes by 2050.

While EVs account for a high proportion of these resources, grid battery storage, solar photovoltaics, hydrogen technologies and wind turbines are also hoovering up supply. Many require a cocktail of different materials, meaning that bottlenecks around even small quantities of specific minerals could pose a problem.

But despite the urgency of scaling up production, the markets for these materials are still at an early stage in their development, and prices have slumped in recent months following an excess of supply.

Chilean mining company SQM reported a 10% drop in Q3 earnings for its lithium business, citing a downward price trend that “could continue for the remainder of 2023”. The company is optimistic, though: “We believe that annual lithium demand growth could be above 20% for the next five years.”

Maarten Koning, global head of trade and commodity finance at ING, tells GTR that while there’s a lot of talk about a mismatch between supply and demand, with demand for key resources outstripping supply, this is yet to emerge.

“In the context of our business, which is financing supply chains, a lot of these metals are supposed to grow, but are not yet growing as much as we would expect,” Koning says, noting that this has “a lot to do with the slowdown in general of the Chinese economy”.

“There is an investment gap with some critical metals, because when you actually look at the volumes, they’re quite small compared to industrial metals like iron, aluminium and zinc,” Andrew Bloodworth, interim director of the UK’s Critical Minerals Intelligence Centre (CMIC), tells GTR. “The forward demand for some critical minerals is uncertain, so it’s quite hard to predict whether you’re going to get a return on your investment.”

Koning says ING’s strategy in the meantime is to build knowledge and expertise in battery metals, such as nickel and cobalt, as well as to create capabilities for recyclable metals like copper and aluminium.

“We are preparing for this, and we have done some transactions. But compared to our bread-and-butter activities, it’s still in its infancy,” he says.

Currently, there is a lot of demand for project finance to develop the assets, Koning says. “On the trade finance side, at the end of the day, we are consumers of what’s happening globally, because as a trade finance bank, we only start to finance when the mine is built,” he adds.

While the bank is looking at new flows, “it’s not yet a revolution – it’s very much an evolution”, Koning says. “A lot of our clients are preparing themselves – they’re investing, and they are trying to originate flows and build a market. But the market is still relatively immature.”

Helen Beatty, a partner at Herbert Smith Freehills who specialises in energy transition transactions, tells GTR that while fewer commercial banks are willing to finance mining projects, “the interesting thing about critical minerals is the importance and capital requirements of the associated processing plants, which means that they are not always seen solely as mining projects”. As a result, “a wider pool of commercial bank debt may be available to fund such projects”, Beatty says.

The extraction and processing locations for critical resources frequently differ significantly. For instance, in 2022, the primary source of cobalt was the Democratic Republic of the Congo (DRC), yet it was predominantly processed in China.

Beatty elaborates on the diversity of critical minerals projects, noting that they often encompass much more of the value chain in a single ‘project’. Some involve lenders financing mines as well as full processing refineries, allowing sponsors to extract and process battery-grade metals and sell them to gigafactories and original equipment manufacturers (OEMs) such as automotive manufacturers. On the other hand, some projects only partially process the commodity, requiring further refinement.

She highlights a trend where certain banks, while avoiding direct involvement in mining, are open to funding these projects through their metals and industrials divisions, categorising them as industrial projects due to the refining aspect.

“There is commercial bank funding for these projects, in particular in Europe,” Beatty says.

Addressing the technology risk, Koning adds that the demand for specific minerals depends on the technologies that ultimately win out.

For example, if alternative technology like vanadium flow batteries becomes commercially viable – which the IEA suggests could happen from 2030 – there may be a shift in battery material demand from lithium and phosphorus to vanadium, primarily produced in China, South Africa and Russia.

“Everybody today thinks that lithium-ion is the battery that will be there for years to come, but if tomorrow, we start investing in green hydrogen, maybe we won’t need batteries anymore and we’ll move to a different form of energy storage,” Koning says.


Protecting supply

The growing realisation by governments that urgent action on climate change is needed, plus the twin shocks of the Covid-19 pandemic and Russia’s invasion of Ukraine, which squeezed supply and pushed up commodity prices, have intensified political scrutiny on where these critical resources are located and the development of strategies for securing supplies.

Many countries have instated critical mineral plans, like the EU’s Critical Raw Minerals Act and Batteries Regulation, the UK’s Battery Strategy and the US’ Inflation Reduction Act, while Australia and Canada have a Critical Minerals Strategy apiece.

Exploration spending per country is on the rise, the IEA finds, with Canada and Australia leading on lithium exploration, with over 40% growth year-on-year.

Countries are teaming up, too: the Minerals Security Partnership is a coalition of 14 economies, including Australia, India, Japan, South Korea, the UK, the US and the EU.

“In the last two years we have seen rerating around commodities, and that goes for critical metals and minerals as well as energy commodities, whereby the affordability and reliability part has become more prominent, compared to the sustainability part,” says Koning.

“Governments are much more aware of the vulnerabilities of supply chains and are willing to put more of their capital at work indirectly.”

Beatty flags the role of development banks like the European Investment Bank and the UK Infrastructure Bank (UKIB), as well as export credit agencies, to attract financing.

In the UK, CMIC’s Bloodworth says the country is considered “prospective for a number of so-called critical metals”, though as yet there is no mining in practice.

“There are companies, particularly down in southwest England, who aspire to mine lithium, and may not be that far away from doing so. But the UK will still need to look beyond its borders for sources of material, at least in the short to medium term,” Bloodworth says.

In August 2023, UKIB invested £24mn in Cornish Lithium, which hopes to produce 8 kt of lithium a year – roughly equivalent to 190,000 to 300,000 EV batteries.

Cornish Lithium is also working with clotted cream producer Rodda’s to investigate the viability of a commercial-scale geothermal lithium and heat project on land owned by the dairy company.

If deemed viable, the aim is to use the geothermal heat to decarbonise production processes at the creamery.

Beyond mining new materials, recycling has the potential to be a major source of these resources.

After an initial push to get the required quantities – for every 1kg of cobalt, 480kg of ore must be mined and 860kg of material has to be moved, according to the Energy Transitions Commission – the amount of new resources needed will decrease, depending on how much can be recycled, says Hannah Ritchie, a researcher at the University of Oxford, in her Sustainability by Numbers blog.

This means that low-carbon technologies may eventually lead to much lower amounts of material extracted from the Earth when compared to the 13 billion tonnes of coal, oil and gas that are removed each year, Ritchie notes.

Bloodworth also anticipates the development of a substantial recycling industry in the next 30 to 40 years as the current fleet of electric vehicles reaches the end of its life.

However, recovering critical metals from devices or vehicles poses challenges.

“It’s relatively easy to recover steel from a scrap car, but it’s much harder to remove maybe 500 grams of a critical metal in the battery. We put these metals together in combinations that nature doesn’t, which means that the technicalities of recovering them are quite challenging,” he adds.

While there is little risk of physically running out of critical minerals, Bloodworth points out that accessing them is the problem. “Nature puts them in inconvenient places sometimes, which does mean that there are all sorts of issues to deal with in terms of where they’re mined, processed and refined, as well as the supply chains they move through,” he says.

Although battery recycling technology is still at an early stage, capacity is being developed to rival China’s dominance, particularly in the US and Europe.

Glencore and battery recycling firm Li-Cycle are exploring the development of a hub in Italy to produce nickel, cobalt and lithium from recycled content.

But countries worldwide will always rely to a degree on other nations for supply, says Tom Papworth, a senior associate at Herbert Smith Freehills.

“The strength of critical mineral supply chains is now rightly recognised as a key concern for policymakers, in particular given the current geopolitical context, the concentration of production and processing capacity in just a handful of countries and recent supply chain disruptions and commodity price volatility,” Papworth says.


OEMs and end users

OEMs and battery cell manufacturers are not just relying on long-term offtake agreements, but are also making direct investments in mining and refining.

For instance, Chinese battery cell maker CATL has acquired an almost 25% stake in CMOC, a major producer of cobalt, niobium and copper, while General Motors has invested US$650mn in Lithium Americas.

Their involvement has “absolutely changed the way these projects are done, including making available equity, long-term offtakes and offtake-linked finance”, Beatty says.

“OEMs like Renault, Mercedes and Volkswagen have always had procurement teams to source manufacturing components; in the last 18 months they’re now creating separate divisions that are responsible for sourcing critical battery minerals directly from miners,” she says.

This shift is a departure from the traditional concerns of car manufacturers, as Koning points out, who says that manufacturers clearly prefer to focus on building and selling cars rather than worrying about securing sufficient cobalt or nickel. “The fact that they’re doing that means you can conclude that they are really worried about shortages, and they want to have certainty of material,” he says.

Greater control over raw materials is also a way of making sure the supply is sustainable, as the mining sector remains rife with environmental and human rights abuses.

A spokesperson for SMBC tells GTR in a statement: “As the energy transition and net-zero goals are embedded into the solutions offered by the end producers such as auto manufacturers, market focus has moved to direct access to critical metals.”

End-to-end sustainability solutions mean “improved traceability and accountability of the end user or producer”, they say.

A recent study by NGO Global Witness found that lithium mines in Zimbabwe, Namibia and DRC were connected to reports of child labour, bribery and corruption.

In Panama City, demonstrators have carried out weeks of protests after a revised 20-year contract for a major copper mine in the jungle was approved. Protesters say the mine will increase primary forest loss and exacerbate water shortages, including threatening the supply to the Panama Canal.

And in January 2022, the Serbian government blocked Rio Tinto’s plans for Europe’s biggest lithium mine due to public pressure over environmental concerns, such as fears the development will contaminate water supplies.

As a result, Beatty says that provenance is now rivalling price as a concern for end users.

“Given ESG policies and recent legislative developments in Europe, such as the EU Batteries Regulation, there is an increasing focus on supply chain and provenance, including ESG record, carbon footprint and third-party certifications of mines, such as IRMA [Initiative for Responsible Mining Assurance].”

The dominance of China in the supply chain is facing scrutiny, leading to a move away from reliance on the Asian giant and an increased focus on alternative ‘western’ supply chains, Beatty adds.

Looking ahead, ING’s Koning sees potential for clients building businesses around battery storage systems, carbon credits and even trading grid imbalances, driven by the volatility in wind and solar power.

This evolving customer base is characterised by a strategic mindset, reflecting the dynamic nature of the industry as companies seek to take advantage of the opportunities on offer.

“What I like about the client base I’m seeing is that everybody’s trying to position themselves,” Koning concludes, but adds: “A lot of clients are doing bits and pieces, but are these mature and full-fledged business models? Not yet, in my view.”

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