The risks of a war for raw materials

7-09-2022 | News

For some time the world resource markets have been in tension for economic but also geopolitical reasons. With rising prices and decreasing availability. And in the future we will be able to see real conflicts for the control of resources.

By Alessandro Giraudo

Prices and scarcity. For more than a year now, sui world markets are in short supply of many raw materials and, as a natural consequence, the prices of some have skyrocketed. With the Russian-Ukrainian war the situation has worsened further and one wonders if and when the situation will be able to return to pre-crisis equilibrium. The question of resources, however, has not only cyclical but also and above all structural characteristics and, to understand what is happening and what will happen in the coming years, it is necessary to take into account above all the latter. In this article we will look at some of them.

Rising demand

There world demand for metals multiplied by 8 in the period 1950-2020. It is necessary to compare this figure with the evolution of world oil production which in 1950 was 10 million barrels / day, against the current one of about 100 million, and with a population which increased from 2.5 billion individuals in 1950 to 7, 7 in 2020 and now almost 8 in 2022, according to United Nations estimates!

It is interesting to note that supply followed demand, evidently with setbacks, tensions, moments of scarcity and overabundance. But the incredible advances in technology have made it possible to adapt supply to demand, albeit with delays. THE cycles industry mining is energy, in fact, they are long: between the decision to make an investment and the production of the first drop of oil, an average of 7-10 years pass and in the case of mines 10-15 years pass before obtaining the first pure metal ingot. Instead in the agricultural sector the natural times are much shorter: in the case of cereals it takes an average of 6 months between sowing and harvests, with two world harvests per year depending on the two hemispheres; for some other products longer times are required: 2-3 years for pineapples, a couple of years for coffee, 18 months to obtain a banana that produces 6 months after the fruit… and so on.

Technological advances compensate for lower productivity

The tenor from the mines it is, in general, somewhat decreased. For example, currently an average of 4 kilos of pure metal are extracted from a ton of earth containing copper, compared to at least double 70 years ago; and, from a ton of earth containing gold, extracted at 4,000 meters underground, now 4-5 grams are obtained compared to more than double 70 years ago. In some opencast mines in Australia and the islands to the east, companies generate profits by working thousands of tons of earth from which they extract half a gram to one gram of yellow metal per ton. They are mines that have huge dredges and quarry trucks carrying 350 tons; the famous Belarusian Belaz are even capable of carrying 450 tons of earth, the equivalent of a dozen trucks with trailers that we see whizzing on the highways.

And now, beneath large open-cast mines, when strands of base metals are found, classic underground tunnel mining techniques are increasingly being used to continue mining. These are, therefore, advances which, as in the case of oil and shale gas and diagonal drilling, are enormous, with a impact on prices important.

Future increases in demand

The choices of the political world on an international basis are very clear: decarbonisation of the economy is use of green and sustainable technologies. A laudable choice, because it avoids worsening the resource situation on the whole planet, but which also represents a strong increase in the demand for metals. The new cleaner technologies require, in fact, more traditional metals, but above all non-traditional ones, such asindio (which allows the brightness of the screens), the niobium (essential in wind power generation systems), theyttrium (low consumption light bulbs), theeuropium (laser), theerbium (nuclear medicine and optical telecommunications), just to name a few. There are at least 40 metals in our smartphone and all 5,000 Olympic medals from the 2021 Tokyo Olympic Games were produced by recycling over 6 million mobile phones!

There are various estimates on the very important increase in consumption. For example, in the case of copper, demand is expected to increase for 15% by 2025, by 28% for cobalt, by 35% for nickel and lithium. The installations of solar and wind systems recorded an increase of 249 gigawatts (Gw) in 2020 and this trend is expected to continue in the next few years with an annual average of 217 Gw by 2025. The consumption of copper for the production of solar panels is expected to rise by 560 thousand tons by 2025 and the demand for the production of wind systems is expected to grow by 503,000 tons by the same date.

There production of electric cars (batteries and vehicle electrical structure) should develop very consistently given that a thermally propelled car contains 20-30 kg of copper depending on the size and that an electric car contains an average of 50 kg. Furthermore, the construction of an electrical distribution network to recharge car batteries represents a formidable demand for copper.

Electric cars, which are expected to grow from 6.2 million units in 2021 to more than 13 million in 2025, are also major consumers of nickel and cobalt for batteries. These are two metals that, for now, technology cannot replace and the demand for which is expected to rise by 480,000 tons (lithium) and 69,000 tons (cobalt) by 2025. 

And let's not forget that, while OPEC represents about 40% of world production for oil, China alone represents over 90% of rare earth refining capacity, almost 60% of lithium and over 60% of that of lithium. cobalt, but also 70% of the world production capacity of photovoltaic cells and 50% of the world production capacity of wind turbines. The demand for wind turbines and photovoltaic panels is expected to increase 3 to 4 times over the next 10 years; there demand for strategic materials is expected to increase between 4 and 6 times by 2050, according to the forecasts of the IEA.

The battles over copper, nickel, lithium and cobalt

Strong tensions between supply and demand are therefore expected for a number of metals, including copper, nickel, lithium and cobalt, as well as minor metals of which China is a major producer-exporter. They are in progress investments important for increase production and businesses stand by raising capital on the stock and bond markets to carry out their plans. But these companies encounter problems of logistics and energy availability to carry out the extraction and refining works: many mines (especially the new ones) are, in fact, located in areas increasingly distant from the already existing communication networks.

It is necessary to observe once again the range of producers, knowing that often the panorama of the countries is very concentrated; this reality can fuel first of all economic and, secondly, geo-political tensions. For these metals, the major producers are located in Chile, Russia, China, Australia and, in the case of cobalt, in the Democratic Republic of Congo, the large country in Central Africa which is a real cornucopia of metals, but which is "sick ”Of a great political instability.

The military events in Ukraine and their impact on the supply of Russian-Ukrainian raw materials must therefore lead to questioning the current strategies. Some choices of certain countries (such as, for example, China) to obtain natural resources permanently in various countries around the world, in particular in Africa, reveal the challenges that await us. 

The possession of more or less strategic raw materials has always given power to the countries that extracted them, but the technology that accompanies these raw materials is the other side of the coin. So the know how technology necessary to use these raw materials becomes as strategic as their possession.

Alessandro Giraudo teaches International Finance in a Grande Ecole in Paris. He is the author of Extraordinary stories of raw materials 1 & 2 (ADD publisher).

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