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Under the Banyan Tree - Critical minerals and the Malacca Strait
513 Plays12 days ago
Fred sits down with Nneka Chike-Obi from our Sustainability Research team to talk strategies for avoiding a potential chokepoint in the Strait of Malacca, which is key to the shipping of critical minerals used in the energy transition.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/MMdPlrQ
Stay connected and access free to view reports and videos from HSBC Global Investment Research, just search for #HSBCResearch on LinkedIn or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to 'Under the Banyan Tree' and Asian Markets
00:00:09
Speaker
Welcome to Under the Banyan Tree with me, Fred Newman, Chief Asia Economist here at HSBC Global Investment Research. This is a podcast where we put Asian markets and economics in context. And today we're doing that through the lens of one of Asia's most significant trade routes.
00:00:24
Speaker
The Strait of Malacca is the key global hub for the transportation of critical
Strategic Importance of the Strait of Malacca
00:00:29
Speaker
minerals. And with the energy crisis still fresh in the mind, Asian economies are taking steps to avoid a potential future choke point like we've seen in the Strait of Hormuz. Now, critical minerals are a key component in green technology. My guest today is our head of Asia Sustainability Research, Nneke Chike Obi.
Nneke Chike Obi Discusses Asian Sustainability
00:00:48
Speaker
From our Hong Kong studio to wherever you're listening around the world, this is Under the Banyan Tree.
00:00:59
Speaker
Let's start with some stats on critical minerals at the Strait of Malacca. Asia imports 40 million tons of critical minerals through this waterway every year.
Dominance of China in Critical Mineral Processing
00:01:09
Speaker
China processes 97% of the world's graphite and 95% of the world's manganese. And 90% of global lithium use will be for clean energy by 2040.
00:01:22
Speaker
So, Nneka, thank you so much for joining us. You know, we learned so much in the last few months about the dependence of the world on energy flows out of the Middle East, particularly Strait of Hormuz being closed. And so we understand now much better the dependence really of global energy markets on this particular region. But in one of your latest reports, you look at another type of critical commodity dependence of the modern world, and and this is critical minerals. Tell us more what you mean by critical minerals.
00:01:53
Speaker
Critical minerals are a set of raw materials that have an important economic function. They're used in core parts of the economy like energy, transportation, technology.
Role of Critical Minerals in Clean Energy Technologies
00:02:04
Speaker
um Normally, governments identify which minerals they consider to be critical to them. But we can look at a common set of minerals that are are very frequently on the list of of governments across the world. um In our report, we look at six, which are nickel, manganese, lithium, graphite, copper, and cobalt. From our perspective as sustainability research analysts, those are important to the net zero transition because they play an important role in clean energy technology. So like batteries, for example, solar panels, I imagine, turbines.
Increasing Demand for Critical Minerals
00:02:37
Speaker
Is that where we need some of these minerals you discuss?
00:02:40
Speaker
Yes, exactly. So we took some analysis looking at the stated policy scenario from the International Energy Agency. And this is where governments have made commitments or plans related to a transition away from fossil energy to new forms of energy. And so when we look at those forecasts going forward, there is a huge amount of implied critical minerals demand to deliver those technologies you mentioned. So it would be batteries, which can be used for both electric vehicles, and also for energy storage. We also have ah solar panels, wind turbines, and electric vehicles themselves, which have a higher mineral content overall compared to the traditional internal combustion engine
Geopolitical Landscape of Lithium and Mineral Refining
00:03:18
Speaker
vehicle.
00:03:18
Speaker
So you mentioned things like cobalt and and graphite and nickel, for example. Draw us a map of the world. Where is most of that stuff being mined, and where is it really being processed into more value-added goods?
00:03:33
Speaker
Well, it's interesting. The minerals are actually around all over the world, but we can look at certain ones and try to identify the key areas. So lithium is a core mineral for battery technology, extremely important. um The IEA forecast that 90% of lithium by 2040 will be used for clean energy technology purposes. So that mineral is going to become... the vast majority of it will be used for for low carbon energy. yeah Australia has the largest reserves of lithium, but after Australia, the largest reserves are located in South America, Argentina, Chile, for example. um So those are very, very large deposits. Thinking about some other industrial minerals like cobalt, copper, manganese, very concentrated in Africa, ah Central Africa, like Democratic Republic of the Congo, and also Southern Africa, like South Africa.
Trade Dynamics through the Strait of Malacca
00:04:18
Speaker
When we look at who has the largest mineral processing and refining capacity, it's far and away China. Around 90% of global minerals' capacity refining capacity is in China. So those critical minerals are going from Latin America, Australia, Africa, and traveling essentially through the Strait of Malacca in Southeast Asia towards China and other economies that are significant in producing, like um Korea and Japan.
00:04:44
Speaker
So the Strait of Malacca is of course the Strait around Singapore, Indonesia, Malaysia, which connects the Indian Ocean to the Western Pacific and and to saying some of the African supplies pass through there, go to mainland China. But it's interesting, um the way you describe that is that maybe the sources of these minerals are as more diverse maybe than the energy space.
Supply Chain Vulnerabilities and Comparisons
00:05:07
Speaker
but that the processing is actually much more concentrated because when we talk about oil refineries, they're dotted around the world. I mean, there's some countries that have more refining capacity than others, but really it's it's much more concentrated when it comes to the processing of these materials. Is that right?
00:05:23
Speaker
Yes, that's correct. I'll also say in terms of refineries, though, there is a concentration of refinery capacity in the oil sector on the Strait of Malacca itself. um So the largest refineries in Southeast Asia are actually located on that straight. And there's Singapore is the largest port in the world for ship refueling and bunkering. So actually there is a concentration, which is partly why the dependence on the Strait of Malacca is a bit of an issue, because from a maritime perspective, it's very difficult for ships to take an alternative route because there's so much infrastructure there from maritime services and refueling. And it's also the shortest route between the Indian Ocean and the South China Sea. Alternative routes would add days and and miles to the journey. And obviously that means cost from a shipping company's perspective.
Adapting Technologies to Supply Constraints
00:06:05
Speaker
So that there are some parallels then if we think in terms of the global vulnerability to a potential supply shock because of disruption of shipping lanes. If there was an accident, for example, in the Strait of Malacca or it was closed for other reasons, there's also tsunamis and earthquakes we can think about. That would actually hinder traffic through the Strait of Malacca and therefore impact global critical mineral processing because everything needs to be shipped to China essentially.
00:06:34
Speaker
and And so there is a vulnerability building up that you discussed your report. But you also suggested there are ways to address some of these these vulnerabilities. And i want to talk about that because, you know, we learned that we need to be more diversified in our supply chains. We learned that in COVID with all sorts of goods. We learned it again during the recent Gulf crisis.
00:06:55
Speaker
But we also now have to essentially create some resilience around critical minerals. And what are some of the strategies that governments might adopt? Let's go through each of those. The first is the use of technology. And I think this is something I i try to convey when speaking about the net zero transition is a lot of this is a technology story.
00:07:16
Speaker
So we have to think about creating new forms of technology and also think about what advancements and developments in those technologies might mean. So how the situation looks now in terms of battery capacity, for example, or cost versus traditional fossil fuels, these things are going to change over time as there's technological development.
00:07:34
Speaker
What we found quite interesting is that if you look at the production of electric vehicle batteries, the Chinese market has significantly shifted away from nickel-based batteries towards the lithium-ion phosphate battery, which is called LFP, which is a low-nickel battery.
00:07:49
Speaker
And this has become the most dominant battery type in China. So around 80% of new electric vehicles are being manufactured with these LFP batteries as of 2024. Whereas in the rest of the world, the nickel-based battery is actually the most common lithium-ion battery in electric vehicles.
00:08:05
Speaker
The reason for this is that the largest source of nickel in Asia is from Indonesia. And since 2020, the Indonesian government has restricted the exports of raw nickel ore. in order to develop their own domestic manufacturing and processing industry.
00:08:21
Speaker
So this has made access to raw nickel ore for Chinese manufacturers much tighter in the past few years. And what we've seen as a result is a change in battery technology to completely reduce their dependence on nickel. So this really in response to potential supply disruptions rather than necessarily that the underlying technology was outdated.
Regional Strategies for Manufacturing and Supply Chains
00:08:40
Speaker
This is really in order to reduce the vulnerability to disruptions of nickel that Chinese producers... probably nudged by the government, moved away from the use of nickel-based batteries.
00:08:52
Speaker
Yes, exactly. And so we're now looking that the LFP battery is actually most likely to become the most common battery in EVs worldwide because of China's dominant position in the market and their choice to move away from nickel.
00:09:03
Speaker
So one solution then is substitution, getting away from minerals that are harder to get, where the potential choke points um that that disrupt the supply. What would be another solution that one might adopt to to mitigate the threat of disruption?
00:09:19
Speaker
ah One solution that we see mainly from Korean and Japanese manufacturers is locating their production facilities closer to both the end markets and the source of the critical minerals.
00:09:30
Speaker
So Japanese and Korean producers, automotive producers and battery manufacturers have made significant investments over the past few years in manufacturing facilities in North America, mainly the U.S. and Mexico. So actually, if you look at the top producers of batteries in Korea and Japan, they now have the majority of their production facilities overseas in terms of their global battery manufacturing capacity. So they're actually thinking far ahead and saying, I'm putting my factory here because i don't have to route my raw materials through a potential choke point.
00:10:04
Speaker
Exactly. Because a lot of the critical minerals come from Africa, which can reach North America through the Atlantic, or from South America, which can access North America from either Pacific or Atlantic coasts, there are many more options. and For example, the Panama Canal can be completely avoided, for example, depending on... which entry point and then using over-road transport to the final destination. So it provides a little bit more flexibility.
00:10:26
Speaker
So I guess moving the location of of processing, of moving these factories physically, that that helps to mitigate some of these supply disruptions.
Recycling and Reuse in Energy Storage
00:10:36
Speaker
um what What is a ah third potential solution that you discuss in your report to to mitigate the threat of supply chain disruptions?
00:10:45
Speaker
ah So this one is interesting for a sustainability analysts like myself, and that's actually recycling and reuse. So most of the forecasts for energy storage demand, which includes both electric vehicle batteries and energy storage systems, which support renewable power generation, most of these forecasts have an assumption that a certain portion of this will need to be filled by reused or recycled material. um There are two ways that you could recycle material from a battery, for example. You can reuse the battery itself.
00:11:15
Speaker
And so an electric vehicle battery that still has around 70% of its energy efficiency can be repurposed directly for energy storage. And that can provide backup energy for a renewable power system or for a data center, for example. And these are already happening, so these are practical applications that exist already.
00:11:34
Speaker
The second way you could consider is just stripping the battery itself for the minerals that are inside, which will continue to have a residual value given their high demand in all of the places we talked about, energy sector, technology sector, etc. So the Chinese government, for example, also has a very dominant role in mineral recycling and has the majority of the world's capacity there. But as we see ev adoption growing in markets around the world, the pool of used batteries and used battery minerals is going to continue to grow. And so that's another option where you can reuse those minerals without having to have a new trade flow of importing raw materials. Which might actually mean that that countries that adopted EVs earlier and have a bigger stock of EV are more quickly reaching the point where they have actually a critical number of old EV batteries that they can recycle. So that would help them in the long term secure some of the supply. I'm thinking about Europe fairly rapidly increasing the use of EVs right now.
Conclusion: Building Resilient Supply Chains
00:12:31
Speaker
Yeah, and we're starting to see the EU as one of the the governments where we're seeing policies addressing what happens at end of life and putting requirements on battery manufacturers, EV manufacturers to trace batteries all the way to their end of life and to figure out if they go for reuse in a new system or whether or not the minerals are being recycled. So we're starting to see some policy action there around the world.
00:12:53
Speaker
Well, there you have it, ladies and gentlemen. Neko, thank you so much for coming. And I think that's an enlightening conversation because as we kind of hopefully see the Strait of Hormuz open again, i think it's critical that policy leaders, business leaders are thinking about the vulnerabilities of supply chains outside of energy, critical minerals, of course, the materials of the future, important for the energy transition.
00:13:17
Speaker
securing that, reducing vulnerability. So hopefully we make the the system more resilient because we don't want to get from a fossil fuel dependence to a critical of mineral dependence. And then we still have the vulnerabilities that we grapple with over recent decades. So Nneka, thank you for coming in and anne we'll check in again with you later this year to see ah progress on all of these issues. Thank you very much. Thanks, Fred.
00:13:40
Speaker
And thank you to all our listeners as always. Great to have you with us under the banyan tree. For those of you going away, have a great summer and we'll talk to you again very soon.