The critical minerals 'arms' race

The world is in the midst of an unprecedented energy transition which will be driven by a massive deployment of a wide range of renewable energy technologies. Many of these rely on critical minerals including lithium, cobalt, and graphite. In addition, geopolitical risks and risks of supply chain disruption are driving governments across the world to invest in securing critical minerals’ supply sources, further fuelling demand. The twin forces of decarbonisation and energy security are poised to drive the demand for critical minerals for many years to come.

What are critical minerals?

According to Geoscience Australia, a critical mineral is a metallic or non-metallic element that is essential for modern technologies, economies, or national security, and has a supply chain risk of disruption due to geopolitical issues, trade policy or other factors¹.

Critical minerals are integral to the realisation of Net Zero goals and are used across a range of clean-energy infrastructure such as solar panels, wind turbines, and electric vehicles (EVs). Clean energy technologies are more material-intensive – they require more minerals to build vs their fossil fuel equivalents² . Below is an example that highlights material use across clean energy technologies. 

Mineral use in clean energy technology versus a conventional car and coal power

Demand is projected to be ‘off the charts…’

Critical minerals such as lithium, cobalt, graphite, and rare earth elements are crucial components in rapidly growing clean energy technologies, and demand for these minerals is likely to accelerate from here on as the energy transition gathers pace. So too the demand for conductive base metals like copper and nickel. The International Energy Agency (IEA) forecasts that, based on current government policies (Stated Policies Scenario), demand for lithium could increase by ~13 times by 2040. Based on Paris Agreement-aligned adoption of clean energy technologies (Sustainable Development Scenario), demand for lithium could increase by ~42 times by 2040.

Growth of selected minerals demand in 2040 relative to 2020

…Though supply is the bigger challenge

A major challenge facing this sector is the geographic concentration of supply chains, with China being the dominant player. Globally, China refines 68% of nickel, 40% of copper, 59% of lithium, and 73% of cobalt3, 4. But while China dominates the downstream market, it is not as important in the upstream market, with Australia and Chile mining more than 70% of global lithium, and the Democratic Republic of Congo (DRC) accounting for nearly 70% of cobalt mining.

The geographic concentration of processing operations in China is a key vulnerability for the energy transition⁵. Both the European Union and the United States have recognised dependence on China for critical inputs and technologies as a major reason to increase their critical mineral supply chain resilience⁶.

But there is a question mark over whether the West can achieve its goal of securing critical minerals’ supply chains, as China has dominated this market for more than three decades and new investments have a long lead time⁷.

Australia is poised to be a global leader in critical minerals

Australia is a world-leading critical minerals exporter and is one of the top producers of lithium. Globally, countries are looking to diversify their clean energy supply chains, and Australia with its vast critical minerals reserves can play a crucial role in potentially de-risking the global critical minerals supply chain. According to the International Monetary Fund, Australia is in the driver’s seat and is set to benefit from a massive surge in demand for critical minerals worth US$12.9 trillion over the next two decades⁸. However, to fully exploit this opportunity Australia needs to push further into downstream refining and component manufacture, leveraging its potential access to unlimited amounts of low-cost renewable energy.⁹

Mining of critical minerals – is it green enough?

Mining or extraction of any mineral can be carbon-intensive, result in soil degradation and water shortages, and damage local ecosystems. Mining of critical minerals is not an exception. For instance, lithium extraction harms local ecosystems, results in air contamination, and can cause water shortages¹⁰. Production of critical minerals is energy intensive and can lead to significant carbon emissions, but this does not negate the decarbonisation advantages of clean energy technologies: the end use case of critical minerals when considered over the full cycle of emissions compared to other technologies. Total lifecycle greenhouse gas emissions of EVs are around half those of internal combustion engine cars on average, with the potential for a further 25% reduction with low-carbon electricity¹¹.

Multi-year investment thematic that is just getting started…

The energy transition is here to stay, and critical minerals are going to play a crucial role in enabling the technologies underpinning the transition. A significant increase in demand is likely for critical minerals over the coming decades as this transition accelerates. Additionally, government strategies focused on energy security will see a ramp-up of investments in the sector.

Betashares Energy Transition Metals ETF (ASX: XMET) focuses on pure-play critical mineral mining companies and producers of a range of critical minerals and conductive base metals, as well as other companies involved in the mining, exploration, and recycling of these minerals.