Why Geopolitics Will Matter for the Energy Transition

Securing critical resources for the energy transition will overlap with geopolitical turbulence, painting a murky picture for supply chains.

From black gold to the green rush, the energy transition will be marked by a period of turbulent geopolitics and policy-induced volatility. What makes this macro theme so consequential is it is occurring at a time of great change.

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.

This is a crucial distinction, for it is the defining feature that marks the difference between now and the paradigm of globalization we are used to.

That’s not to say that states are deliberately being inefficient, but rather they are prioritizing political security now in a much more pronounced way than before, and this shift has major implications financially, politically, and economically.

Demand for Resources

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 crucial magnetic material 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 7-fold 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 futures. 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

New green technologies often require more physical materials for the same output when compared with their conventional counterparts during the construction phase. For example, battery electric vehicles (BEVs) are typically 15 to 20 percent heavier than comparable internal-combustion engine (ICE) vehicles and will therefore become a key driver for materials demand in the coming decades.

Estimates range from 35% to 68% of new car sales being EVs by 2030, with a likely range falling between 40% and 50%. This translates to around 25-40 million EVs sold annually by 2030, compared to about 7 million in 2022.

The IMF forecasts that under net-zero scenarios projected to 2050, production of graphite, cobalt, vanadium, and nickel falls short of demand, with a potential gap exceeding two-thirds. Even metals like copper, lithium, and platinum face potential shortfalls of 30-40%, jeopardizing their ability to meet future clean energy needs.

Narrow Geographies, Concentrated Geopolitical Risks

The narrow clusters of key minerals and metals necessary for the energy transition is poised to be a flashpoint for supply chains. For example, 70% of cobalt supply is from the DRC, and 70% of rare earths are mined in China.

The top six producing countries for copper made up around 60% of production in 2022, and this has major implications for modern geopolitics.

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

In 2022, Indonesia 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

In 2022, the Democratic Republic of the Congo (DRC) produced 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.

Copper

In 2022, Chile produced 5.9 million metric counts, accounting for 27.45% of the global production, with Peru at 2.7 million metric tons or 12.59% of global production.

Apart from Australia, Indonesia, DRC, and Chile have a history of political instability. The prevailing risk here is of it spilling over into their mining activities and disrupting global supply amid a period of heightened demand. But that’s mostly just extraction.

Concentration is even stronger at the refining and processing stages, and the country with a near-monopoly of it is in a tug-of-war with the US.

China plays a dominant role across five key energy transition materials (cobalt sulphate, copper, lithium carbonate/hydroxide, nickel, and the rare earth elements). Washington’s ABC (Anything But China) policies means de-risking will necessitate reorganizing a deep, globally-embedded node in a critical supply chain.

According to the Energy Transition Committee (ETC):

“Such high levels of concentration increase the risk of supply shortages relative to demand. Geopolitical tension could generate policy responses which restrict the supply and increase the price of specific commodities, especially at a regional or national level; political instability could disrupt supply; and localised issues, ranging from drought to unstable power supply, can knock out supply from a particular region or country”.

Significant investments in processing and refining capacity, of $70–100 billion each year through to 2030, will also be needed. The problem is geographic concentration. At the mining stage, a few countries dominate the production of specific commodities.

Supply Chain Bottlenecks

The intensifying focus on regionalism in regulations, exemplified by the US Inflation Reduction Act and the EU Green Deal Industrial Plan, could compound the challenges of geographically concentrated metal supplies.

This convergence might result in restricted access to resources for certain regions, potentially hindering project development.

Securing approval for future projects could become increasingly difficult if developers fail to demonstrate minimal environmental impact and maximize positive social contributions to local communities.

Recent examples like the stalled lithium projects at Thacker Pass (Nevada) and Mina do Barroso (Portugal) highlight the growing importance of community engagement and social responsibility in securing resources for a green transition.

There is also the time horizon to consider. The operationalization of mines - i.e. construction, acquiring permits, etc - has increased from five to 10 years as a result of extensive environmental and social impact regulations.

To alleviate the pressure of policy-induced demand, countries like Saudi Arabia are looking to embed themselves in the global supply chain for energy transition metals. You can read more about that here.

With targeted industrial policies increasingly carrying geopolitical strings attached to them, supply chain reorganization is going to have another complicated layer to it. Specifically, vendors will now have to more carefully pay attention to the state of international affairs to either avoid penalties or be awarded tax credits.

Understanding and integrating geopolitical risks into the final analysis of a business decision is therefore no longer superfluous, but necessary.