Trade Finance TV: Mining tomorrow’s energy infrastructure

A secure and orderly clean energy transition means access to key minerals and metals and ongoing investment in oil and gas. It can’t just stop because of everyone’s net zero pledges. Returning to Trade Finance TV are commodities experts Julian Kettle and Yann Ropers to explain this complicated pathway.

Kettle says that, for metals and mining corporates, “there is simply not enough free cashflow to distribute dividends, decarbonise themselves and deliver the growth”. And Ropers sees metals and minerals investment as a collective responsibility where banks and financial institutions can help, “despite the complexity of financing metals and that those markets are more volatile than those of oil and gas”.

Participants

Julian Kettle, Julian Kettle SVP and Vice Chair of Metals and Mining Wood MacKenzie, Commodities

Yann Ropers, Global Head of Natural Resources Finance, Deutsche Bank

Presenter

  • Clarissa Dann, Editorial Director, Deutsche Bank

Transcript of interview:

Clarissa Dann: Welcome to Trade finance TV. I’m your host, Clarissa Dann. Today we’re discussing a secure and orderly clean energy transition. This means access to key minerals and metals and ongoing investment in oil and gas.

Clarissa Dann: Julian. Why is the clean energy transition so metals intensive?

Julian Kettle: Put simply, if you want to generate, transmit, store or use low carbon electricity, you do metals. If you want to deploy EVs, you need metals. It’s the same with renewables. It’s the same with green hydrogen. We’re increasing metals intensity per unit of electricity generation. So for example, an offshore wind farm to install a gigawatt of capacity requires around about 11,000 tonnes of copper. Now that energy runs at a 35% utilization. So to give you a gigawatt hour, you need 33,000 tons of copper. Compare that with a thermal power plant and you need less than 3000 tons. So there’s a massive factoring up when we go towards a green transition.

Yann Ropers: The world economy now is run with, you know, energy that we’ve been using for multiple decades. The infrastructure is built upon it. Right. So to actually transform the entire world economy and have a new energy sort of mix, you need massive investment in infrastructure, which means massive investment in metals and mining that goes with it.

Clarissa Dann: So how is investment going? Are we doing enough of it?

Julian Kettle: Well, I would argue we’re so far behind where we need to be. Firstly, we look to the major mining companies to deploy the capital to invest in growth and in a number of the so-called critical commodities. And for some, while their shareholder base have not wanted to forego their dividends, and there isn’t enough free cash flow to distribute dividends, to decarbonize themselves and to deliver the growth. So we are under investing at the producer level. Yes, we’ve got government initiatives. We’ve got in the US, the Rea, the Inflation Reduction Act, although some would argue that’s a contradiction in terms, inflationary. But it’s taking a long time. And yet the targets that have been set for 2030, 2040 haven’t really changed that much. And the problem is that unless we can deliver the metals, we can’t deliver the renewables, the EVs, etc., it all grinds to a halt. It all slows down.

Yann Ropers: I’m not too worried because I think, you know, obviously things will accelerate. I think it will mean necessarily potentially some influence on the energy transition net zero pass. But what I wanted to add is what can we do collectively to actually get the capital where it should be? So it’s not only equity and shareholders, it’s also what banks and financial institutions can do to finance the necessary investments.

And that is also complex, right, because the metals space is generally more volatile than, for instance, oil and gas or the commodities that have been financed. Banks need to form a view on their risk appetite for the industry. The increased complexity here is that if you look at certain projects, like for instance, rare earth in Australia or elsewhere, the actual IIR on the project works based on prices that are higher than median price or historical prices. So how banks view future prices in 15 years time has implications on how banks perform their risk appetite and deliver commitment to the industry as well.

Julian Kettle: And I think there’s an important point you make around IIRs in returns, because if we think about the entity that has delivered its energy transition pathway, it’s China. China doesn’t think in the same way that we do as far as China is concerned. It doesn’t care where it extracts the returns, which part of the value chain, as long as in total it generates a return. Whereas we look at each individual part of the value chain, and the problem is, if we are to wean ourselves off China, we are going to have to invest in the West. It’s going to be higher capital costs, and higher operating costs requires higher prices. And the returns maybe initially won’t be there. So it comes back to your point about risk appetite. We are going to have to do more risky things if we are to deliver the transition. I think achieving net zero is highly implausible at this stage, again, because of the lack of capital investment. All the way down to mining, it’s not just mining. We talk a lot about a just transition. You know, we in the West do not want the mining and burning of coal because of emissions. And yet that is the low cost, available energy source for most of the developing world.

Clarissa Dann: So what is your base case?

Julian Kettle: Our base case is a 2.53 pathway although we are increasingly looking at more like a 2.7 degree pathway. It’s not a base case yet, but we’re behind target. In terms of demand for oil and gas we have them peaking in the early 2030s. Again that’s a line to two and a half three pathway. The world changes if we don’t decarbonize as fast as that. We could end up with high gas forever under a slower transition. Oil would peak around 2035. Even at 2.5 degrees, it’s going to be extremely challenging. There are lots of unknown unknowns that we have to assume in terms of delivering that.

Yann Ropers: I think, you know, if you’re a corporate and you, for instance, a European corporate, you want to make sure you secure your supply for the long term, but you need to achieve your short term goals in terms of returns, in terms of profitability. How far can you go in actually subsidizing or accepting higher price with a new deposit, or a new development versus something that is cheaper or more competitive? So that’s the sort of things that the West needs to make its mind on, right? Because at the moment China dominates the world of transition minerals. And so there are some geopolitics associated with investments as well.

Clarissa Dann: Let’s start with the geopolitics. We looked at all this two years ago when you were last in. What’s changed since then?

Julian Kettle: Western governments have made a really good start in realizing that we need to do something, that China dominate the midstream. And that’s where the focus is, is reducing reliance on China’s dominance because of the fear that China will use its geopolitical influence through critical minerals and minerals processing. The US is doing what it does best, which is throwing money at the problem. The EU is doing what it does best at this stage, which is putting in place policies and procedures to try and initiate.

Yann Ropers: It’s a very complex topic because you also need social acceptance of the transformation and the costs associated with it. So if I come back to the topic of IIR, you know, the costs of getting these minerals out will be higher. And of course, the transformation infrastructure required will cost money to society in the West in particular. If I look at the US, very interesting debate at the moment, because the’ve enacted a view as to what we’re doing to transition renewables, etc. but factually we see a lot of real localization of manufacturing down to cheap natural gas that they can actually produce on the ground, and that may actually accelerate their own transition path because they have access to the cheap gas now for longer term goals. And that’s not necessarily something that Europe has. So I will point out the latest Biden administration view as to what they do with natural gas exports to preserve cheap gas on the ground. And that’s maybe something that’s a question mark for Europeans and other powers that do not have access to the same sort of cheap energy at the moment.

Julian Kettle: Supply of gas or oil or coal without investment will fall faster than demand, so we end up with an unjust transition. So all of these things need to be on the table in terms of policies around oil, gas, coal, CCS, and what you might call the green area of the economy, the technologies and the applications that we love to talk about because they’re very, very green, aren’t they? And yes, they are, but they come at a cost. One of the major challenges that we have had, for example, in renewables is returns. Returns aren’t there. So why would investors invest in renewables when the returns aren’t there? The same with EVs. If you look at what Tesla is doing right now, it’s reducing the price because they’re not selling. The solution to the lack of capital investment could be provided by oil and gas. If you think the oil and gas is going to be deploying 5 to $6 billion a year in CapEx in metals and mining, we only need 100 billion a year. That’s all. But the industry is currently delivering around about 40 to 50. Well, half where we need to be. So how do we get around this problem of lack of investment? All of this will cost money and society, quite frankly, it wants green. It wants energy transition, but it doesn’t want mining. We can do something through the recycling of materials that will grow fast, but not enough.

Yann Ropers: I have to be more optimistic. If you look at just the power sector, for instance, it’s already fast decarbonizing and most European countries will be net zero on the power supply in the next few years, including the UK. So things are progressing in the right direction. But we need to decorrelate the power supply, energy requirements and the global energy mix because energy is not just power. I think it would be much more complex to fully decarbonize with what is not power, right? So yes, we need to have more power generation that can be decarbonized. I think even with the lack of investment in minerals, the problem is what are the hardest bits to decarbonize? And that’s where I think we overlook at the moment. But that will come. I mean, as you say, investment in the metals and mining sector is not so massive to make it happen. Right? So I’m quite hopeful that collectively, you know, financial institutions, investors, shareholders will actually come together and make it happen.

Julian Kettle: Am I optimistic we’ll find a way? Yes. But I think things will probably get a little bit worse before they get better. We unfortunately need a few more challenges to be presented to society and governments to say, look, this is real. We need to move faster.

Yann Ropers: I think we need to let the energy transition happen. Right? So and so we won’t get to an accelerated net zero pathway by rushing into things. And we’ve done mistakes in the past collectively like pushing on biofuels. And then we realized that it creates all the problems and consequences we didn’t want like deforestation etc.. So by trying to push too hard without understanding the consequences. We may crash, as you say, before we get better. And I think we should try to look at the complexities and not be too simplistic about how we tackle the transition.

Clarissa Dann: I’d like to thank our two experts, Yann and Julian, for their insights. And of course, I’d like to thank you for watching. For our other episodes do go to TRADEFINANCETV.COM.

Published on May 13, 2024

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