'In the long run...' Demand, supply, and the economics of resource availability

The mining industry has a problem, bemoaned Codelco chairman Oscar Landerretche, the economist who heads one of the world’s largest copper and molybdenum producers. What problem? A “bullish” atmosphere at the recent London Metals Week.

Surely that’s good news for the industry? Hardly, Landerretche said, speaking at the Veolia Institute’s 10th International Conference on resource availability. The highly financialised mining industry reacts to short-term boom-and-bust cycles. During an upswing, there is no incentive for companies to manage material efficiency or mitigate their impact. Conversely, on a down-swing, there is no money to do so. Rather, Landerretche indicated, he would prefer a “technological arms race” to manage mining’s environmental impacts, such as remediating old mine sites or using desalination to treat water.

As Landerretche’s comments illustrate, short-term market signals often clash with long-term goals to steward the metals and minerals necessary for low-carbon technologies, creating conflicting incentives for business. How can the balance be tipped in favour of nudging companies and their shareholders to think more about resource availability, the sustainability of primary resource extraction, and a shift towards both materials and energy efficiency in a low-carbon transition? How can we ensure metals and minerals will not be a limiting factor to the growth of the low-carbon, circular economy?

Future scenarios

For markets to operate properly, allocate resources and make supply meet demand, we first need to understand what demand for metals and minerals might look like, via various future scenarios. Metals such as copper and aluminium for power transmission, batteries and other infrastructure will be essential to electrified low-carbon systems, said Yale University industrial ecology expert Thomas Graedel. While technological change is highly unpredictable, work done on metal demand projections suggests 2.5 to 4 times current demand, and 3 to 4 times current production by mid-century, Graedel added.

The automotive industry is a key source of potential demand growth. If the US auto market switched from steel to aluminium in SUVs, pickups, MPVs and elsewhere where it is not already used, auto sector demand for aluminium would balloon – accounting for 40-70% demand growth in the US and Western Europe. As for copper, hybrid electric vehicles use 30kg of copper per unit, while battery electric vehicles use 60-80kg per unit.
Besides major metals like copper and aluminium, the demand for ‘companion’ metals such as indium and gallium is growing. These solar-cell materials, and many other minor metals, are produced only or largely as by-products: indium is a by-product of zinc processing, while gallium is a by-product of aluminium, for example. If production of major metals falls, so will production of their companion metals.

By some estimates, low-carbon technologies alone in 2050 will increase metal demand by 10% from today – putting distinct additional pressure on resources, yet not so large as to be a reason to panic, noted UC Berkeley’s Sangwon Suh.

The business case for resource efficiency

Do markets work? Broadly, yes, said Oxford economist Cameron Hepburn. Pricing sends efficient signals to the market, pushing companies to find new sources of materials and more efficient ways to use them. To some degree, the scarcity or availability of resources is priced in. So far, though, high prices have pushed most companies towards finding new reserves rather than using resources more efficiently. But what about pricing negative externalities, technological and business model innovations, and long-term stewardship to make resources available? For these, markets aren’t necessarily efficient, and in some areas there is a near-complete absence of markets, such as pricing carbon emissions.

Industry can take some steps on its own to support sustainable resource availability. To shelter its R&D investment from the effects of market fluctuations, Codelco created a subsidiary specifically to research and develop new innovations to minimise environmental impacts.
Speakers also challenged businesses to recognise the value of the circular economy: for instance, investing in the circular economy offers opportunities to keep assets in cycle for longer. Historically, value was generated in a linear way: fast moving consumer goods companies have 80% discard rates. But technology, data and business models are converging, making products-as-a-service and improved asset utilisation a possibility. Jamie Butterworth of Circularity Capital described the $630bn of potential and 840 growth-stage companies in his firm’s pipeline, out of which 1 in 100 will be selected for investment. Circularity Capital invests in what Butterworth termed “enablers”, companies that provide solutions and services for the circular economy, and “transformers”, companies that are transforming their products, materials, and operations to become more circular and capture value from waste.

For larger companies, the circular economy is also an elegant way of mitigating supply chain and other business risks: resource availability improves resilience, and they might also benefit from lower insurance pricing, better credit markets and so on.  And securing circular supply sources reduces reliance on potentially volatile primary resource markets, noted Systemiq co-founder Martin Stuchtey.

But businesses must also win over financial institutions: actuaries and accountants resistant to address the new accounting challenges that circular business models might produce; and banks, pension funds, and private investors unaccustomed to valuing non-financial impact.
To some degree, investors are already taking a hard look at businesses’ environmental risks. Four out of five institutional investors in an EY survey this year said companies had neglected environmental, social and governance issues for too long, but generating sustainable returns over time required a sharper focus on these. Meanwhile, a CDP report in July examined mining companies’ true emissions costs and risks from water stress. “Ultimately, investors need to see the hard evidence that companies are really doing this,” Butterworth said.


This story is drawn from sessions at the “Strategic Materials for a Low-Carbon Economy: From scarcity to availability,” a conference co-hosted by the Veolia Institute and Oxford Martin School in November 2017.