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‘Soaring metal prices may delay energy transition’

Analysts have said that clean energy needs may cause years of high prices for metals such as nickel, cobalt, copper and lithium under a net-zero emissions scenario

The world’s historic pivot toward curbing carbon emissions is likely to spur unprecedented demand for some of the most crucial metals used to generate and store renewable energy in a net-zero emissions by 2050 scenario.

Latest report from IMFBlog indicates that a resulting surge in prices for materials like cobalt and nickel, would bring boom times to some economies that are the biggest exporters—but soaring costs could last through the end of this decade and could derail or delay the energy transition itself.

Written by the quartet of Lukas Boer, Andrea Pescatori, Martin Stuermer, and Nico Valckx, the bloggers believe that prices for industrial metals, an important foundation for the global economy, have already seen a major post-pandemic rally as economies re-opened.

For example, lithium, used in batteries for electric vehicles, could rise from its 2020 level around $6,000 a metric ton to about $15,000 late this decade—and stay elevated through most of the 2030s. Cobalt and nickel prices would also see similar surges in coming years.

A resulting surge in prices for materials such as cobalt and nickel copper and lithium, would bring boom times to some economies that are the biggest exporters—but soaring costs could last through the end of this decade and could derail or delay the energy transition itself.

Net-zero scenario

Assessing different scenarios to achieving net zero, the writers said: “We look specifically at the goal of limiting global temperature increases to 1.5 degrees Celsius, which requires a transformation of the energy system that could substantially raise metals demand as low-emission technologies—including renewable energy, electric vehicles, hydrogen, and carbon capture—require more metals than fossil-fuel counterparts.

“Our focus is on four important metals among the variety being used for the transition. They are copper and nickel, major established metals which have traded on exchanges for decades, and minor-but-rising lithium and cobalt, which have traded on exchanges only recently but are gaining popularity because they are important for the energy transition.

“The fast pace of change needed to meet climate goals, such as the International Energy Agency’s Net Zero by 2050 Roadmap, implies soaring metals demand in the next decade. Under the IEA’s ambitious scenario, lithium and cobalt consumption jumps more than six fold to satisfy needs for batteries and other clean energy uses. Copper use would double and nickel’s would quadruple, though this includes meeting needs unrelated to clean energy.”

They argued that the demand surge under a net-zero scenario is frontloaded because renewable energy components such as wind turbines or batteries need metals upfront. “On the supply side, however, production is slow to react due to the long lead times for opening mines, and only eventually eases market tightness after 2030,” they added.

Macro-relevancy

The bloggers also noted that under a net-zero emissions scenario, booming demand for the four energy transition metals alone would boost their production value six fold to $12.9 trillion over two decades.

This could rival the roughly estimated value of oil production in a net-zero scenario over that period. The four metals could affect the economy via inflation, trade and output, and provide significant windfalls to commodity producers, they added.

A credible, globally coordinated climate policy; high environmental, social, labour, and governance standards; and reduced trade barriers and export restrictions would allow markets to operate efficiently. This would direct investment to sufficiently expand metal supply, avoiding unnecessarily cost increases for low-carbon technologies and aiding the clean energy transition.

Furthermore, they noted that the concentrated supply of metals implies some top producers may benefit. Usually, countries with the largest output have the greatest reserves, and likely would be major prospective producers.

For instance, the Democratic Republic of the Congo, for example, accounts for about 70% of global cobalt output and half of reserves. Other standouts include Australia, for its lithium, cobalt, and nickel; Chile, for copper and lithium; along with Peru, Russia, Indonesia and South Africa.

“A long-lasting metals boom could also bring substantial economic gains, especially for large exporters. In fact, we estimate that a persistent 10% rise in the IMF metal price index adds an extra two-thirds of a percentage point to the pace of economic growth experienced by metals exporting countries relative to importing ones. Exporters also would see a similar magnitude of improvement for government fiscal balances from royalties or tax revenues.”

Policy implications

The quartet also argued that the high uncertainty surrounding demand scenarios is an important caveat. Technological change is hard to predict, and the speed and direction of the energy transition depends on the evolution of policy decisions.

Such ambiguity, they said, is detrimental because it may hinder mining investment and raise the odds that high metal prices derail or delay the energy transition.

In their opinion, “A credible, globally coordinated climate policy; high environmental, social, labour, and governance standards; and reduced trade barriers and export restrictions would allow markets to operate efficiently. This would direct investment to sufficiently expand metal supply, avoiding unnecessarily cost increases for low-carbon technologies and aiding the clean energy transition.”

Finally, an international body with a mandate covering metals—analogous to the IEA for energy or the UN Food and Agriculture Organization—could play a key role in data dissemination and analysis, setting industry standards, and fostering global cooperation.

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