The best thinkers on energy

A wide range of critical minerals are needed for the energy transition. Tae-Yoon Kim at the IEA summarises the reasons why we should expect this to be a year of price spikes due in the main to the Russia-Ukraine war and post-lockdown supply chain bottlenecks. So severe is the problem that the long record of declining costs in clean energy technologies like solar, wind, batteries and electric vehicles is being reversed. Although these crises will pass, they threaten to knock climate goals off track. The IEA calls for renewed efforts in cost-reduction methods we can control – innovation, efficiency and scale-up – as well as the diversification of supply. Minerals reviewed include lithium, cobalt, nickel, aluminium, copper, palladium and uranium.

Clean energy technologies require a variety of minerals and metals, and today’s tense geopolitical situation, rising commodity prices and supply chain bottlenecks have highlighted the need for serious actions to enhance the diversity and resilience of their supply. At the IEA Ministerial Meeting in March 2022, IEA Member Countries voted to endorse and deepen the IEA’s work on critical minerals as part of the Agency’s new mandates to strengthen and broaden its work on energy security.

Prices of many minerals and metals that are essential for clean energy technologies have recently soared due to a combination of rising demand, disrupted supply chains and concerns around tightening supply. The prices of lithium and cobalt more than doubled in 2021, and those for copper, nickel and aluminium all rose by around 25% to 40%.

The price trends have continued into 2022. The price of lithium has increased an astonishing two-and-a-half times since the start of the year. The prices of nickel and aluminium – for which Russia is a key supplier – have also kept rising, driven in part by Russia’s invasion of Ukraine. For most minerals and metals that are vital to the clean energy transition, the price increases since 2021 exceed by a wide margin the largest annual increases seen in the 2010s.

Innovation and economies of scale had rapidly reduced the cost of key clean energy technologies such as solar PV and batteries, but surging raw material prices could now reverse these gains, with a major impact on the financing needs for clean energy transitions around the world. Raw materials now account for a significant and growing share of the total cost of clean energy technologies.

For example, cathode materials – which are essential for lithium-ion batteries and include lithium, nickel, cobalt and manganese – accounted for less than 5% of battery pack costs in the middle of the last decade when there were only a handful of battery gigafactories. That share has risen to over 20% today when some 300 gigafactories are at different stages of planning and construction around the world. Higher prices for cathode materials in 2021 pushed up lithium-ion battery pack costs by an estimated 5% from their 2020 levels. With the recent surge in lithium and other battery metal prices in early 2022, this figure is now around 20%, which needs to be offset by other measures to contain or reduce overall costs.

From batteries to solar panels and wind turbines, the rapid cost reduction trends seen over the past decade mostly reversed in 2021, with prices for wind turbines and solar PV modules up by 9% and 16% respectively. Prices for lithium-ion batteries are likely to see a major uptick in 2022. In China, relentless rises in lithium prices are already translating into higher prices for electric vehicles, with Tesla, BYD and Xpeng announcing price hikes of 2% to 9% in March 2022.

Higher commodity prices will not always rule out further cost reductions for clean energy technologies, but only if there is a redoubling of efforts to reduce costs via technology innovation, efficiency improvements and economies of scale. Companies will also have to pay more attention to managing price risks along the value chain. An extension of existing incentive schemes could be considered to avoid consumers turning their back on clean energy technologies.

Russia is a major producer of many minerals and metals that are vital for the clean energy transition, and the country’s increasing international isolation puts additional pressure on already tight markets. The first impacts were felt in aluminium markets where Russia in 2020 accounted for 6% of global aluminium production (the second largest producer worldwide) and 8% of imports to the European Union. As aluminium production is highly energy intensive, high natural gas and electricity prices had already affected nearly half of the European Union’s production capacity by early this year, according to an industry association. With supply also being cut in China, aluminium prices rose to record highs after Russia’s invasion, adding stress to many end-use industries such as the automotive sector.

Tensions are also visible in the battery metals market. Russia produces around 10% of the nickel that is mined worldwide, but it accounts for almost 20% of the supply of Class 1 nickel, which is the grade needed for batteries. It is also the second largest producer of cobalt and the fourth largest producer of graphite.

The frenzy in nickel prices in early March brought the potential perils into sharp relief. Prices skyrocketed from USD 25,000 a tonne to over USD 100,000 a tonne in a single day, and the London Metal Exchange suspended nickel trading for around a week. This event was not driven by market fundamentals but rather by a short squeeze involving a major Chinese company that had anticipated a price drop. However, the event was a wake-up call regarding the importance of diversified supply sources. The recent episode also risks undermining investor interest in new projects and reducing trading liquidity at a time when both increased investment and liquidity are sorely needed.

Russia also provides 43% of global supplies of palladium, a precious material used for catalytic converter in cars. Europe accounts for over half of Russia’s palladium exports. As with aluminium, stock levels were already low before Russia’s invasion of Ukraine. Automakers can switch to platinum, but Russia is also a major producer of that, with a 14% share, the second largest in the world.

Uranium for nuclear fuel is another element of concern. While Russia represents 6% of global production for mined uranium, the country has around 40% of global enrichment capacity. Uranium prices, already high at the end of 2021 due to tightening supplies, climbed by about one-third in March 2022 to the highest level since the Fukushima nuclear accident in 2011 in Japan. While uranium conversion and enrichment plants exist in Canada, China, France, the United States and elsewhere, many of them have been operating at low utilisation rates or are idled due to weak profitability. In light of renewed interest in nuclear power’s role in clean energy transitions, Russia’s war in Ukraine underscored the need to diversify enriched uranium supplies, including investment in new facilities and the re-opening of existing plants.

Tae-Yoon Kim is a WEO Energy Analyst at the IEA

This article is published with permission

Filed Under: Energy, Resources Tagged With: aluminium, batteries, China, cobalt, copper, efficiency, EVs, innovation, lithium, minerals, nickel, palladium, prices, Russia, solar, Ukraine, uranium

More Platform Posts >>

Copyright © 2022 Energy Post. All Rights Reserved

Get our FREE weekly newsletter straight to your inbox