by But how might transition metal markets fare?
Written by Robin Griffin, Anthony Knutson and Oliver Heathman in Wood Mackenzie’s metals and mining team.
By 2050 the energy transition could see demand for nickel (Ni) triple, demand for copper (Cu) more than double, and demand for lithium chemicals increase by 700%. The burden on transition metal miners will be huge and the industry will be transformed as investors scramble to deliver the needed metal.
Especially for battery raw materials there will be a dependence on deposits that have yet to be determined. Lithium is a prime example. There is considerable uncertainty surrounding the cost of mining known lithium projects, let alone the millions of tonnes of lithium required from unexplored sources, some of which will rely on unproven technologies. Add in the possibility of global carbon prices and you can understand why the long-term pricing of lithium and other energy transition metals is hotly debated.
So how should we think about supply costs and therefore prices – in a much larger carbon-adverse future market?
Let’s stick with lithium and start by looking at today’s cost curve. The current threshold C1[1] cash cost to produce lithium chemicals (in a refined LCE[2] basis) is about $5,000/tonne for brine, $9,000/tonne for spodumene and over $10,000/tonne for lepidolite – based on the costs of producing, transporting and refining the concentrate.
Given that prices are currently at around $60,000/tonne of refined LCE, it is reasonable to question whether costs are a good indicator of future prices. But lithium is one of the most abundant elements on earth, and it is also reasonable to expect that lithium will eventually behave similarly to all other minerals that are mined. That is, the market will be cyclical with prices occasionally falling to the support levels of the cost curve. It is likely that cost curve support will become more common once divestment from the automotive and electricity storage sectors matures and demand growth slows.
But what will the cost curve look like then, particularly given our forecast for the rapid energy transition scenario where lithium demand could be 7 million tonnes per annum (Mtpa) by 2050, up from 1 Mtpa in 2022. The current our project pipeline totals approximately 1.5 Mt annual capacity, with project C3[3] costs ranging up to $15,000/tonne LCE refined.
It is highly unlikely that current cost structures will be sustainable, even if markets tend to return to equilibrium.
First, quality declines in mineral deposits as existing higher-grade ores are mined and new market conditions allow lower-grade deposits to be evaluated and developed.
Second, greater reliance on lepidolite sources in the future means higher concentration and chemical conversion costs. The structural complexity of feldspars results in generally lower lithium contents and higher impurity ratios.
Third, in addition to new mineral sources, reliance on clay and even seawater sources is likely, meaning the application of nascent technologies from extremely low-grade deposits that will bring additional complexity and technical challenges, resulting in higher costs.
In short, the type of deposits that reside in the fourth quadrant of the current cost curve will increase their share of production over time.
In addition, competition for labor, equipment and raw materials will drive capital and operating costs to continue to rise, particularly while demand growth rates are high. Developmental and operational risk will also increase over time as lithium is sourced from more complex deposits in higher risk jurisdictions. Expect more expensive debt and equity and higher rates of disruption.
Despite the potential for technology savings in the long term, based on what we know about existing operations, it is hard to imagine incentive costs staying below $20,000/tonne LCE Refined before carbon costs are assessed.
Carbon regimes add to the uncertainty about future costs
The advent of carbon pricing has the potential to accelerate cost increases for lithium producers. Lithium mining, concentrating and converting requires large amounts of energy. The main sources of emissions are identified by ore roasting and acid roasting during the refining of mineral concentrates and mining pumping and brine harvesting. We estimate in 2023 global Scope 1 and 2 emission intensities of 2.5 to 3.0 tonnes CO on average2e/t LCE refined for brine deposits and 10 to 12 CO;2e/t LCE refined for standard spodumene sources. The emission values were derived from Wood Mackenzie’s upcoming Lithium Emissions Benchmarking Tool module, which is expected to be released in early Q2 2023.
Carbon pricing regimes will be a reality for the foreseeable future. Whether a global system will ultimately prevail is open to debate, but most miners and processors will either have to release carbon or pay for the privilege of emitting greenhouse gases. To account for its impact on the market, we can apply various carbon prices to our cost data: in this case, we used a global price of US$88/ton, which reached by 2050 in our base case US$133/ton in the 2.0- grade script[4]and $163/ton to achieve 1.5 degrees[5].
When we apply these carbon prices to abated global lithium operations and projects in 2025, for example, the weighted average C1 meter cost of $5,700/tonne refined LCE increases by $600/tonne, $900/tonne and $1,100/tonne t respectively. Under the same exercise, diving into the types of lithium deposits reveals that marginal cost increases at different rates, reflecting their varying energy intensities.
What might carbon pricing mean for metals?
Higher marginal costs will typically mean higher prices on average, and this will be true for all commodities until supply decarbonisation matures, when the carbon cost effects will diminish. Meanwhile, early mover sellers may enjoy some margin growth as they move down the cost curve.
The energy transition offers a bright future for all transition metals. Suppliers of lithium, nickel and cobalt, copper and aluminum will be under pressure to meet the needs of the transport and power sectors while decarbonizing their own operations. Funders and governments face the same pressure as those who enable change. Some reluctance is understandable given the uncertainty of technology and politics. But “fortune favors the brave” is an adage that fits perfectly with those suppliers looking to accelerate their mine development and decarbonisation goals. As cost curves get longer and higher, these miners and processors should be rewarded with higher profit margins.
Learn more from our experts by attending Wood Mackenzie’s Future Facing Commodities Forum on March 16, register now.
[1] Direct cash cost and excluding royalties, depreciation and amortization, conservation capital
[2] Lithium carbonate equivalent. Conversion of 6% Li condensate to 56.5% Li chemical.
[3] Include C1 cash cost plus royalties, depreciation and amortization, retention capital, corporate hidden and interest
[4] Wood Mackenzie’s 2.0 degree Accelerated Energy Transition scenario depicts our view of a possible world state that limits the rise in global temperature from pre-industrial times to 2.0 °C by the end of this century.
[5] Wood Mackenzie’s 1.5 degree Accelerated Energy Transition scenario depicts our view of a possible state of the world that limits the rise in global temperatures from pre-industrial times to 1.5 °C by the end of this century (Global Net Zero Emissions by 2050 under the AET1.5 scenario)
