Chasing net zero: Mind the 'Reality Gap'

IMDEX chief geoscientist, Dave Lawie contemplates what he calls the ‘Reality Gap’ – the distance between the desire to decarbonise and the reality of achieving it

Dave Lawie
 Just how will a lack of copper affect international plans to achieve net zero?

Just how will a lack of copper affect international plans to achieve net zero?

Between the idea and the reality falls the shadow; between the desire to decarbonise and the reality of achieving such an outcome is the shadow of supply shortages, declining ore grades, and deeper and more expensive mining of the minerals and metals required.

The ‘Reality Gap' is at the heart of the modern mining malaise, burdened by the weight of expectation to deliver, the wider lack of understanding of its central role in a net-zero future, and the fluctuating market and geopolitical realities that make investment decisions inherently dangerous.

Inflationary pressures are now forcing up costs, leading to a slew of negative announcements on cost blow-outs, impairments and delays at the very time project certainty is required.

Those at the heart of the mining sector have been sceptical for some time that metals and minerals such as nickel and copper can be found and mined in sufficient quantities to meet the demand of a low-carbon world.

Supply questions also remain around critical minerals including lithium, manganese and cobalt, and rare earth elements as well as the diversity of their supply chains.

Sounding the alarm

The warnings are becoming louder and the potential Reality Gap more apparent and I've been sounding the alarm for some time.

There is a desire in the world to decarbonise, but the reality is that to get there we need to produce more of the commodities in the next 10 to 20 years than we ever have. I really don't think governments, investors, analysts and even some mining companies understand the extent of the problem. Ivanhoe's Robert Friedland has been sounding the alarm too, but I wonder if anyone has been listening.

In an interview with Bloomberg recently to discuss copper supply and demand Friedland said: "We're heading for a train wreck."

A recent report by consultants McKinsey, The Net Zero materials transition: Implications for global supply chains, said "it is crucial to ensure the timely scale-up of projects that have already been announced, which will require mining to accelerate beyond historical growth rates for many materials while simultaneously doubling down on exploration to ensure further scale-up of supply beyond 2030.

"Investments in mining, refining, and smelting will need to increase to approximately $3 trillion to $4 trillion by 2030."

The report concluded that "an assessment of supply-demand balances shows that most materials within the scope of this report would face a shortage by 2030 across all scenarios".

McKinsey assessed a range of materials including copper, lithium, cobalt, nickel, manganese, graphite, and some rare earth elements.

The International Energy Agency's recently released Critical Minerals Market Review 2023, revealed a 30% increase in investment in critical minerals development in 2022, following a 20% increase in 2021.

"A host of newly announced projects indicate that supply is catching up with countries' clean energy ambitions, but the adequacy of future supply is far from assured," the report said.

Chinese domination

On the downside, it said the supply chain continues to lack diversity, with China dominating the processing of REE, graphite, lithium, cobalt and copper, and the extraction of graphite and REE. From 2018 to 2021 Chinese investment to acquire lithium assets was twice that of the US, Australia, and Canada combined. It is also investing in processing, refining and downstream facilities in other regions, often with an aim to secure strategic access to raw materials.

Both reports agree that everything must go right for planned mining projects - no cost overruns, schedule delays, ESG challenges - for the looming supply-demand deficit to be addressed.

Personally, I err on the side of the Reality Gap rather than on the market responding to avoid a train wreck, and am concerned about China's continued and increasing dominance, and its propensity to embark on cartel-like behaviour to protect its position.

Everything would need to go right to avoid shortages. And we know from history that that is not the case. Supply-demand issues may have eased now, but issues will arise to throw that out of alignment, not the least of which is the extraordinarily long lead times between discovery and production and the ever-present threat of geopolitical instability.

And now rising costs and the realities of finding and mining critical minerals, some with complex geology, are beginning to materialise.

More bad news

The bad news is not confined to Australia; projects in other countries are reporting cost blowouts and impairments, which will dent investor confidence at a time when projects everywhere need access to capital.

The challenges are another reminder that obtaining real-time, reliable ore body knowledge is critical. Some of the recent impairments can be linked to ore body knowledge - or the lack of it.

A write-down pushes future production further out, depresses net present value and adds to the overall cost of production when it does start.

Obtaining the best ore body knowledge as far upstream from the production process as possible at least gives resource companies a clear understanding of the challenges they face - and it could be the difference between an uneconomic or economic mine.

Not only do I have concerns for future copper supply, but nickel has the potential to face similar problems, too. I don't think the world quite gets the situation in Indonesia. In the blink of an eye, they are going to control most of the global nickel supply - and there are major environmental issues in the country. The IEA report says Indonesia is on track to control nearly 90% of the world's nickel refining projects by 2030.

Unexplored opportunities

However, there is another, largely unexplored, mining opportunity - the seabed. Proponents say it is a more sustainable way of mining the minerals needed to meet carbon reduction targets, while opponents warn of the potential for widespread and long-lasting environmental damage.

In some ways, the debate on deep-sea mining confirms the Reality Gap argument. If there were no concerns about supply/demand imbalance and the potential for us to meet future targets, would we even be having this discussion?

At some point, there is going to be an existential truth that the globe needs to face up to and that is are we prepared to destroy some parts of our planet to protect the remainder?

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