LONDON, July 17 (Reuters) - First the good news.
The supply of minerals critical to the green energy transition could move close to levels needed to support climate pledges by 2030, according to the first annual review of the sector by the International Energy Agency (IEA).
Investment in the critical minerals pipeline grew by 20% in 2021 and by 30% in 2022, led by lithium, copper and nickel.
Exploration spending was up by 20% last year with Canada and Australia both registering year-on-year growth of over 40%, notably in hard-rock lithium plays, according to the IEA.
The less good news is that the sector needs to do more if it is to match the level of demand required to achieve net zero emissions by 2050.
Moreover, "the adequacy of future supply is far from assured", the IEA said.
The IEA highlighted potential problems with project delivery times, a continued lack of geographical diversification and "mixed progress" on improving sustainable and responsible practices in minerals and metals production.
TIMING AND COST
The extended time-lag between a new mining or processing project being announced and delivered is a well-known issue in the metals sector.
Risks of schedule delays and cost overruns have been "prevalent in the past" and "cannot be ignored" when projecting future supply, the IEA said.
Copper mines are a good example, major new greenfield projects typically taking at least five years to enter production.
The problem is compounded in the case of lithium, a metal that is core to current battery technology, by the need to generate a high-purity product.
There is a significant step-up from producing technology-grade to achieving consistent battery-grade lithium. "This means that even with an overall balance of supply and demand, the supply of battery-grade products may still be constrained," the IEA said.
In addition, new projects often come with higher costs, exerting upwards pressure on pricing.
Although prices of some critical minerals such as copper have eased over the last year due to recession in the "old economy", prices for most critical minerals remain well above historical averages as supply struggles to catch up with demand.
The IEA's clean energy equipment index, tracking costs of solar panels, wind turbines and batteries, fell consistently between 2014 and 2020 but has since broken that downtrend as raw material inputs push up overall manufacturing costs.
LIMITED DIVERSIFICATION
There has been only limited success in diversifying the geographical sourcing of critical minerals in recent years, the IEA said.
What progress has been made has come largely at the mining stage of the production chain.
The processing segment of the chain has actually become more concentrated as incumbent players consolidate their dominant position.
"Compared with the situation three years ago, the share of the top three producers in 2022 either remains unchanged or has increased further, especially for nickel and cobalt," the IEA noted.
China, which already dominates lithium processing, accounts for half of the world's planned new lithium chemical plants. Indonesia, which has emerged as the world's largest nickel producer over the last decade, will host nearly 90% of planned nickel refining projects.
"The world has not yet successfully connected the dots to build diversified midstream supply chains," the IEA said.
Moreover, China's move to control exports of gallium and germanium underlines the concentration of supply in a host of smaller, esoteric metals that feed into the critical minerals landscape.
Other minerals such as magnesium, manganese, phosphorus and silicon are all niche products but vulnerable to disruption due to a high reliance on a limited number of suppliers.
Despite increasingly strenuous efforts by the United States and Europe to diversify supply chains, "all countries rely on a functioning global market for critical materials and related technologies," according to the International Renewable Energy Agency (IRENA).
"Each critical material has a unique geography of trade which, on an aggregate level, entangles countries in a broader web of interdependence," IRENA noted in a just-released report titled "Geopolitics of the Energy Transition" .
ESG CHALLENGE
The IEA's assessment of progress on environmental, social and governance (ESG) measures across 20 key companies shows headway being made on community investment, health and safety, and gender equality.
However, "environmental indicators are not improving at the same rate," it warned.
The sector's greenhouse gas emissions remain high while water withdrawals almost doubled from 2018 to 2021.
ESG issues have become a key determinant of new supply in the form of local push-back against both mining and processing projects.
IRENA estimates that 54% of energy transition minerals are located on or near Indigenous peoples' land, the percentage rising to over 80% in the case of lithium projects.
Around half of the world's copper and lithium production is concentrated in high water-stress areas, including the lithium triangle in South America, according to IRENA.
Potential conflicts over both land and water rights feed back into the new supply equation in the form of delays at the permitting stage of any project.
COULD DO BETTER
This is the IEA's first major update on green transition metals and, like the IRENA report, it is an attempt to understand the three-way challenge of producing enough of them to meet carbon reduction targets, simultaneously diversifying supply and doing it all in an environmentally friendly way.
There's quite a lot of good news on the first part but considerably less on the second and the third, particularly when it comes to Western countries' ability to scale up their own supply chains in the face of environmental opposition.
Indeed, the risk of minerals conflict appears to have moved up a notch after China flexed its critical metal muscles in the niche gallium and germanium markets.
There is potential for many more clashes in areas such as deep-sea and Arctic mining. Both are new frontiers for metals production but each is heavily disputed, both geopolitically and environmentally.
If it were a school report, the IEA's first annual assessment of the critical minerals sector would be headlined: "Has made solid progress this year but still much room for improvement."
The opinions expressed here are those of the author, a columnist for Reuters
(Editing by David Evans and Mark Potter)
