The risks of the energy transition

Click here to view Robertson's column.Miners, after decades of criticism from government and activists for digging holes that disturb the environment, now face potential criticism for not rapidly expanding the supply of energy and new-technology metals which will help the world shift away from fossil fuels such as coal and oil.As John wrote: "The unprecedented expectations now surrounding the metals industry are, at the same time, a unique opportunity as well as an impossible challenge".In effect, mining is morphing from environmental villain to environmental hero, but it will only win friends if it can produce the lithium, nickel, copper, cobalt, and other metals needed to cut demand for fossil fuels, a herculean task given that the switchover is expected to occur in the next eight to 10 years, roughly the time it takes to discover and develop a new mine.Public criticism, however, could be the least of the problems, especially for investors who have been enjoying record dividends from high metal prices, sparking demands that more money be spent on exploration and project development and less on shareholder rewards.In effect, mining could be seen as an essential industry in the drive to limit the worst effects of climate change and it needs to work faster on delivering the goods.A suggestion like that might sound unfair but other industries have suffered a form of socialisation such as banks in the aftermath of the 2008 global financial crisis when limits were placed on dividends paid by banks which had accepted government assistance during the GFC.As John pointed out, the mining industry needs to be careful in trumpeting its role in helping solve the world's energy challenge because when supply shortfalls emerge the industry could be portrayed as the villain."The mining industry is at risk of being the bad guy in plans to decarbonise the world. In just a few years, the world could be turning on the miners for their failure to do enough," he wrote.If you take the point to its logical conclusion, and it's easy to see the recent round of record dividends and share-price boosting buybacks being portrayed as miners milking cash from the broader community while global temperatures rise.It's not a pretty picture but it is one which is starting to become a talking point in non-mining circles, such as in a recent report by the leading management consultancy, McKinsey & Company, which described how the metals and mining sectors will be "at the core of enabling the energy transition."McKinsey said metals intensity will rise dramatically as the world moves toward cleaner technologies with the mining industry under pressure to provide vastly increased quantities of essential raw material.But meeting the call for ever-increasing supplies of metals will require significantly expanded capital expenditure as well as trying to manage unavoidable price surges and bottlenecks as demand outstrips supply.The long lead time of discovering and developing new mines will also weigh on the industry as it is squeezed by calls for more raw material which will require high levels of capital investment while also battling the time-consuming government approvals process."Supply, demand and pricing interplays will emerge across different commodities, leading to feedback loops followed by a combination of technology shifts, demand destruction and materials substitution," McKinsey said."Metals and mining companies will be expected to grow faster, and more cleanly than ever before while at the same time end-user sectors will need to factor potential resource constraints into technology development and growth plans."Importantly, McKinsey said demand for minerals and metals is expected to grow significantly faster than supply with lithium supply needed to expand seven-times faster than current growth rates while investment in copper and nickel will require an additional US$250 billion to $350 billion by 2030."As the raw materials supplier to the economy, the mining sector will need to grow at an unprecedented pace in order to enable the required technological shifts," McKinsey said."The sector will be expected to move at a faster pace, despite its traditional reputation as a long-lead time, highly capital-intensive industry."Other prominent business observers are also chiming in with suggestions about managing the raw materials demand challenge including a reminder from the Financial Times columnist John Dizard of a US solution to a uranium shortage in the 1940s.Back then, the Atomic Energy Commission offered a minimum guaranteed price and a 10-year purchase contract along with bonuses for significant uranium finds in the US.What worked for uranium might also work for copper, Dizard suggested, because: "you cannot get to the energy transition without copper and other essential metals."That suggestion is an example of offering the mining industry a carrot to get on with the job.Failure to meet raw materials demand, or to be seen bleeding off to much profit in the form of shareholder rewards, and governments will reach for the stick

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