Saudi Arabia Energy Transition Strategy Explained: Critical Minerals
This three-part series will analyze the geopolitical ripple effects of Riyadh's pivot from oil to energy transition renewables. Part I.
This article is part I of a III-part series dedicated to analyzing Saudi Arabia’s energy transition strategy. The first report will layout the energy transition landscape globally, Riyadh’s efforts in this context, and the Kingdom’s critical minerals strategy.
The second will focus on hydrogen, solar, and the logistical considerations behind its supply chain initiatives. And the third part will layout the geopolitical implications both regionally and globally if KSA becomes an energy transition superpower.
Saudi Arabia has been exerting relentless efforts through its ambitious initiative for sustainable energy to bolster its global and regional position by securing a foothold in the global supply chain for renewable energy.
This is coming at a time when the global economy is at an inflection point in geopolitics, energy, and technology. States concerned about being left out or falling behind are increasingly deploying government-backed capital to ensure they are at the very least at par neck-with global developments.
Industrial Policy
This is referred to as industrial policy: a strategic effort by a government to encourage the development and growth of specific sectors or industries within its economy. As security takes precedence, governments are playing a bigger role in industries with geostrategic importance by providing accommodative financing conditions.
Whether in the form of interest-free loans or tax incentives, global leaders are looking to wield a number of policy levers to accelerate their position in this multi-dimensional race. In industries with high costs and long-term horizons for returns in an environment of high interest rates, the private sector will need a push — or a pull.
Legislative measures like the US Inflation Reduction Act and European Chips Act are just two of many examples of targeted industrial policies. Sovereign wealth funds have also proved to be a popular conduit through which the state can inject capital to advance their industrial policies.
Saudi Arabia’s Public Investment Fund (PIF) is one such example of a state leveraging its capital to advance geostrategic objectives. It states that its international strategic investments are meant to:
“solidify Saudi Arabia’s position on the global scene as an impetus for the advancement of ventures for things to come. Therefore, this pool comprises a combination of long-term investments, which aim at establishing strategic partnerships through direct and indirect investments. This contributes to expanding the kingdom’s global reach and impact, with a focus on industries of the future.”
Vision 2030 has been instrumental in directing capital and magnetizing foreign investment by providing a clear direction for the kingdom’s geopolitical and energy-related aspirations. The PIF has a target to develop 70% of the kingdom’s renewable energy capacity by the end of the decade.
The National Renewable Energy Program (NREP) is part of Vision 2030 and is the action plan that translates the country’s renewable energy ambitions into concrete steps and projects. As I will demonstrate below, these objectives are instrumental in driving the kingdom’s energy diversification efforts.
The Geopolitics of Energy, Supply Chains
In the current environment, articulating a clear objective with strategic value becomes an imperative. The tectonic plates of geopolitics are shifting, and with it, new economic fault lines are being created. Supply chains are being re-organized not for economic maximization, but geopolitical optimization.
That is not to say that economies are deliberately being inefficient for the sake of it, but rather they are prioritizing political now in a much more pronounced way than before, and this shift has major implications financially, politically, and economically.
Resources necessary for the energy transition are characterized as “transition metals,” and these are primarily lithium, cobalt, nickel, and copper. These are all expected to sharply increase in demand with the shift toward energy transition-focused policies.
A sharp rise in demand for these resources, combined with an inelastic response amid shifting supply chains creates notable upside risks to inflation. Or specifically, “greenflation,” and that leaves markets, economies and states vulnerable to the disruptions caused by a rapid energy shift transition.
In anticipation of these risks, Saudi Arabia is deploying proactive measures to shield itself against policy-related volatility. If executed properly, Riyadh’s transition policies would not only reinforce its regional standing but make it a central node in the emerging global energy paradigm.
Doing so will pay geopolitical dividends and ensure that the kingdom will remain a global powerbroker long after oil ceases to be its main source of economic dynamism.
Minerals, Metals and Mining
While there is significant uncertainty about the outlook for the energy transition, one fact remains certain: it will be a resource-demanding transition. The IMF estimates that copper, nickel, cobalt and lithium will be most impacted by the global energy transition.
Whereas minor supply shortfalls (around 10%-20%) are anticipated for metals like nickel, critical components like dysprosium, a chemical element atomic and an earth element used to improve magnets used in electric motors, could face significant shortages exceeding 70% of projected demand.
Forecasting expected demand and subsequent impact on price is predicated on the time horizon and type of scenario. Specifically, achieving net zero by 2040 or 2050 will have radically different implications for the price of key transition metals. The range of estimates varies.
The World Bank expects a sevenfold increase in lithium demand by 2040 compared to 2020. In a net-zero emissions scenario, the IMF projects a 25-fold increase in lithium consumption by 2050 compared to 2020. And finally, the IEA presents a range of possible future trajectories.
In its Sustainable Development Scenario (SDS), demand significantly exceeds supply, with lithium demand being 51 times higher than today’s levels by 2040. Applying the IEA’s SDS to the rest of the transition metals of cobalt, nickel and copper, we see a radical increase in demand:
21x increase in cobalt demand by 2040 compared to current levels
9.7x rise in nickel demand by 2040 compared to current levels
6.2x rise in copper demand by 2040 compared to current levels
Most of the minerals and metals necessary for the energy transition are concentrated in regions and countries with elevated political risks. With lithium, in 2022, Australia produced approximately 61,000 metric tons, accounting for 49.91% of global production, with Chile at 39,000 metric tons or 31.81% of the global total.
Nickel is primarily dominated by Indonesia, which produces 1.6 million metric tons a year, accounting for 61.07% of global mine production, with the Philippines far behind at 330,000 metric tons, representing 12.60% of the global total.
Cobalt, the most concentrated — and one of the most critical — transition metals is located in the Democratic Republic of the Congo (DRC). The central African country produces approximately 175,000 metric tons, accounting for 78.83% of global production.
In second place is the Philippines at 30,000 metric tons, or 13.51% of the global total. And finally copper, with Chile having produced 5.9 million metric tons in 2022, accounting for 27.45% of the global production, with Peru at 2.7 million metric tons or 12.59% of global production.
To avoid getting the short and expensive end of the supply chain, Saudi Arabia is strategically tapping into its rich reserves of minerals and precious metals to pave the way for a future that is less dependent on oil.
The kingdom has recently reassessed the value of its mineral wealth, elevating it from $1.3 trillion to an impressive $2.5 trillion.(6) The kingdom is investing heavily in its future, committing $200 million to a comprehensive geological mapping project and the creation of a resource database, building on a previous $500 million survey investment.
This updated valuation brings to light substantial deposits of gold, copper and zinc, which are expected to play a crucial role in the challenging energy transition ahead, where the demand for such resources is likely to exceed supply. The landscape for mining — both figuratively and literally — is harsher than expected.
As The Economist correctly pointed out:
“Unfortunately, miners are also investing a lot less than they once did, as their latest set of earnings, released this week, confirm. The world’s biggest miner, BHP, last year spent less than half of what it did a decade ago. In part that is for sensible reasons: miners are rightly conscious that theirs is a boom-and-bust industry. The last time they splashed out, during the China-led bonanza of 20 years ago, a spectacular crash followed.”
This lack of flexibility in the supply chain, coupled with pressure on publicly traded mining companies to adhere to ESG metrics, is likely to result in higher metal prices as demand outpaces slow-moving supply.
The green push is creating a multifaceted supply problem that will likely translate into higher commodity prices for mining companies. And the geography and geopolitical topography will complicate the process and potentially push commodity prices — and shares of companies specializing in their extraction — higher.
According to The Economist, “Governments are not helping” mining industries exposed to the energy transition. But this is not entirely true. Crown Prince Mohammed bin Salman (MBS) is steering the country to become a major resource hub, mirroring its pivotal role in the global oil market.
Saudi Arabia is actively encouraging investment in its mining sector with several key measures. This is on top of the kingdom’s deal to become a minority shareholder in Brazilian mining giant Vale’s $26 billion-valued copper and nickel unit.
According to the Financial Times: “A joint venture between Saudi Arabian Mining Company and the country’s Public Investment Fund will own 10% of the division, which supplies materials required for the transition to cleaner energy.” Saudi Arabia is looking to position itself as a key node in the battery supply chain through the creation of lithium processing facilities.
By 2030, it is anticipated that the worldwide need for lithium will surge to over four times the levels seen in 2022, growing from 720,000 metric tons to an estimated 3.1 million metric tons. However, the projected lithium supply globally in 2030 is unlikely to satisfy this burgeoning demand.
Saudi Arabia’s aggressive industrial policy, channeled primarily through generous allocations from the PIF, outpaces even the substantial expenditures of the United States’ Inflation Reduction Act.
The kingdom has established a dedicated Ministry for Industry and Mineral Resources, reduced license fees and royalties, and overhauled its mining laws to mirror the investor-friendly frameworks of countries like Australia, Botswana, and Canada.
These reforms have significantly cut down the time to obtain mining licenses to just two months, contributing to a 20% increase in active licenses since 2022, now totaling 2,300.
But critical minerals is just one side that is the dodecahedron of the energy transition. Hydrogen and solar production strategies are being developed and deployed to increase Saudi’s geo-economic leverage. To find out what those strategies are, stay tuned for part II, to be released on Monday, October 7 at 6:00 AM Pacific.
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*This report is a re-publication of a paper I was commissioned to author for the Rasanah Institute to analyze the risks and feasibility of Saudi Arabia’s energy transition strategy.