Will conflict and energy security concerns spur accelerated decarbonisation?

The Russia-Ukraine conflict has highlighted the stark reality that the world relies on Russian oil, gas and critical raw materials supply. The drive to ramp up alternative hydrocarbon supply and renewables capacity will require vast quantities of metals – but how quickly can the supply chain respond?

In this article:

  • Reducing reliance on Russian natural resource
  • Renewable build-out constrained by metals supply
  • Is demand destruction the only option to rebalance metals markets?

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Throughout history, armed conflict and its associated human misery have always spurred governments and society into action. Sanctions on Russia are becoming more onerous, with the US, EU and others announcing restrictions on oil and gas imports. Energy supplies are also being disrupted because some buyers cannot obtain letters of credit for Russian cargoes, and are reluctant to be left with anything they can’t sell on.

This creates something of a paradox. Governments need to ensure energy supplies as the global economy ramps up after the pandemic and with the northern hemisphere still in the midst of winter. Yet these same governments are looking to reduce their reliance on Russian hydrocarbons and critical raw materials while, at the same time, accelerating the build-out of renewables.

Tight natural resource supply chains limit alternatives to Russian natural resource supply

The global recovery has tightened natural resource supply chains and there is very little supply elasticity, at least in the short term. The US is looking to ramp up oil production and has reportedly been in talks with Venezuela to lift sanctions to enable oil exports. And the shuttering of coal-fired power plants in the US, Europe and elsewhere could be slowed. Were the West able to pull a rabbit out of a hat and deliver the additional supply in the short term, the energy transition might come to a screeching halt.

The parallel path is to accelerate the build-out of renewables. But that would require far more critical raw materials, some of which Russia supplies – and in large quantities. While critical raw materials are not on the sanction lists, we are aware of corporate self-sanctioning. Buyers are also increasingly unable to obtain letters of credit to finance the purchase of metals from Russia. If critical raw materials cannot be obtained, a faster ramp-up of renewables capacity will stall before it has started.

Raising metals supply will take time

As discussed in my previous article, stock levels for many of the commodities needed to fast track renewables build are adequate. However, in the absence of Russian supply, they will become depleted relatively quickly. Even if Russian metals supply remains isolated from sanctions, the backdrop of strong demand in all end sectors on an accelerated decarbonisation pathway is going to be extremely challenging.

Another paradox is that a global economic slowdown or recession could provide the necessary breathing space to build supply security. For natural resources, the only real solution appears to be demand destruction or a recession.

As far as supply growth is concerned options are four-fold:

  • Maximising output from existing operations. The potential to raise output from existing operations is limited with the industry running at high effective capacity utilisation levels.
  • The restart of idled operations on care and maintenance or those partially idled. This is not a quick process, with lead times stretching out from six months to a year at a minimum.
  • Project development lead times are in the five to 10-year range, and are likely to extend as ESG requirements collide with risk aversion. Constraints exist at each stage of the development pipeline from discovery and feasibility to construction and ramp-up.
  • Innovation and technology. Mine life extensions, the high-grading of supply and the application of technology may provide additional metals tonnages, but options are limited. We assume miners and producers are doing all they can to maximise supply anyway. They are certainly incentivised to do so, with record-high prices. There is no equivalent to tight oil/gas development in metals that will fast track significant supply in the short-medium term.

Western governments are between a rock and a hard place. They are unable to ramp up alternatives to Russian hydrocarbon or critical metal supplies fast enough to meet demand. Prices already reflect this, and will inevitably choke off demand in the near term. But this will incentivise supply in the medium to long term, which will allow the energy transition to accelerate.

Sadly, it has taken armed conflict to nudge the world onto an accelerated decarbonisation pathway.

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