The energy and oil crises highlighted key vulnerabilities in the global supply chain. These were caused by many factors including extreme weather and geopolitical events. It showed the importance of the global adoption of renewable energy to reduce fossil fuel reliance. In order to make this a reality, steps must be taken to develop a secure global supply chain for materials that are key to producing renewable energy technologies.
Renewable energy adoption is the key to reducing the reliance on natural gas and oil, but it requires a vastly different supply chain. Renewable energy is heavily reliant on rare earth elements (REE) and mineral resources. The average electric vehicle (EV) requires six times more mineral inputs than a conventional car. As global adoption scales, renewables will command a growing share of the REE and mineral resources markets.
Lithium, cobalt, nickel, copper, and REE are key elements in many renewable energy technologies. Lithium, cobalt, and nickel play an important role in batteries and battery energy storage systems. REE is used in EVs and wind turbines. Copper is necessary for electricity networks and electricity-related technologies. Without an ample supply of these materials, the renewable energy industry may face supply constraints and may not meet the growing demand of consumers, businesses, and utilities.
As renewable energy adoption continues to rise, key mineral and REE suppliers will experience an influx of demand. While rapid adoption is important to reach sustainability goals, the supply chain may not be able to keep pace. Under this scenario, materials and REE prices may experience volatility and price appreciation similar to the recent oil and natural gas crises. This raises an important question about how countries can build resilient and sustainable supply chains for key minerals and REE.
Supply Chain Risks
The current characteristics of the mineral and REE supply chain share a similar make-up to the oil and natural gas industries. Each industry has a heavy concentration of suppliers that creates potential geopolitical risk, supply constraints, and future uncertainty that limits the investment capabilities of companies.
Mining & Production
Developing a mine is a capital and time-intensive investment that can take a minimum of five to ten years to set in motion and cost between $500M to $1B to open a mine and separation plant according to MIT. The IEA found that it takes 16.5 years on average to move a mining project from discovery to its first production.
These long lead times require suppliers to commit significant resources to develop new mineral and REE mines. Without proper incentives and foresight into the markets, suppliers may not mobilize quickly enough to meet supply demands as the need for renewable technology ramps up.
This potential vulnerability in the current supply chain may lead to significant price volatility and supply constraints in the future. While this would not affect consumers and companies that already adopted renewable technologies, it would affect many that were considering the transition and present a potential barrier to adoption.
Three nations produce the majority of lithium, cobalt, and REE. The Democratic Republic of Congo (DRC) is responsible for around 70% of the global production of cobalt. China produces over 60% of the global production of REE while also dominating the refinement of nickel, lithium, cobalt, and REE.
The European energy crisis was driven by similar supplier concentration. As energy demand increased due to a historically frigid winter, the European Union saw natural gas reserves dwindle. Combined with Russia’s invasion of Ukraine and unwillingness to increase natural gas supply, Europe faced an energy crisis that drove prices to unprecedented levels.
This illustrates the potential geopolitical risks of supplier concentration that the renewable energy industry is exposed to. Reliance on China, the Democratic Republic of Congo, and Chile to produce and process minerals and REE may lead to disruptions in the event of rising political tensions, extreme weather events like droughts or flooding, or future pandemics.
Renewable Adoption Uncertainty
While renewable energy adoption is necessary to meet climate change goals, current energy industries are still profit-driven and require a degree of certainty to justify investments in renewable energy sources. The majority of revenue generated by mining companies still comes from coal.
With such high investment costs to develop a mineral or REE mining operation, many companies are hesitant when uncertainty about the timing and the extent of demand growth exist. Without more certainty, companies may sacrifice their bottom lines and contribute to a potential oversupply of minerals and REE that lead to a drop in price that would affect their profit margins.
This tension between climate change goals and profitability for mining companies places a strain on supply as demand for minerals and REE increase. The long lead times to develop an operational mine coupled with uncertainty around forecasting demand creates a potential supply risk that may affect the global supply chain in the future.