What does COP26 mean for LatAm’s mining sector?

Agreements at the United Nations COP26 climate summit will lead to a drop in demand for coal but the impact on energy transition metals such as copper will be muted.

Key pledges in the Glasgow Climate Pact, signed by nearly 200 countries earlier in November, include a commitment to “phase down” unabated coal power and accelerate action on climate change this decade.

The deal will have repercussions for the Latin American mining industry, which is a key supplier of many of the minerals needed in the shift to renewable energy, battery storage and electric vehicles (EVs).

Chile and Peru are the world’s top copper producers, while Chile and Argentina are frontrunners in global lithium output.

Brazil was the world’s third biggest producer of bauxite and alumina in 2020, used in aluminum production, according to the US Geological Survey, and a significant producer of nickel, along with the Dominican Republic and Cuba, which also produces cobalt, used in the battery industry.

Mexico is the world’s biggest producer of silver, used in photovoltaic cells, while Colombia is a top 10 global coal producer.

COAL DEMAND

While calls to end coal power were replaced with a commitment to “phase down” its use, following pressure from major coal consumers China and India, the pact is expected to have a significant impact on the coal market.

“The commitment to phase down coal use supports our view that demand for coal is close to a peak, if it hasn’t peaked already,” said Kieran Clancy, commodities economist at Capital Economics.

This is the first time reducing coal use has been explicitly mentioned in any COP agreement, he added.

The requirement in the pact that countries improve their 2030 climate targets by the end of next year will also lead to a significant boost in the share of renewables in power generation, at the expense of fossil fuels.

The pact also approved the implementation of a global market for carbon emissions, first outlined in the Paris Agreement in 2015, which would raise the cost of fossil fuel use.

“The upshot is that the COP26 agreement signals that the direction of travel in the years ahead will be toward lower fossil fuel use and more expansive carbon pricing mechanisms,” Clancy added in a note.

The impact on coal prices is less clear, and will depend on supply.

“As we are seeing lower demand for coal, lower supply would be needed to meet that,” Dmitry Popov, senior coal analyst for London-based consultancy CRU (Commodities Research Unit), told a webinar.

“For thermal coal, specifically, we think that even though there is depletion from existing mines, there is still enough supply from those mines to meet that demand.”

New coal projects could be approved in countries such as Russia, where there is not the same pressure on producers to abide by strict ESG standards.

Coal mining countries, including Colombia, have not announced plans to curtail production.

“As long as the world continues to demand coal, Colombia will continue to be a supplier,” Carlos Cante, president of coal producer’ association Fenalcarbón and a former deputy minister of mines, told BNamericas earlier this month.

Against this backdrop, CRU expects thermal coal to trade around average prices seen in years prior to 2021, which were broadly in the US$50-125/t range, in the period to 2040.

But this could change if countries, particularly more developed nations such as Australia, do decide to halt production.

“If a country says coal mines must stop operating that could definitely lead to some supply shortage and very high prices, like we have seen this year,” Popov added.

Prices peaked at US$240/t earlier this year, but have fallen back to around US$150/t, according to Trading Economics.

ENERGY TRANSITION METALS

The impact of the COP26 pact on metals expected to play a key role in the transition to renewable energy will be less pronounced.

“Do I think this particular COP has revolutionized any particular market that we cover? Maybe not, but all of the [sustainability measures], be they EVs, renewables, be they reductions in coal usage, in some ways are going to change the markets... either on the demand side or the cost side,” CRU’s research manager Charlie Durant told the Glasgow summit.

Even without the latest global climate agreement, demand for metals such as copper is expected to surge as a result of the push to limit global warming to 1.5 degrees C, as set out in the Paris Agreement.

“Green energy transition applications are going to be responsible for something like 25% of growth in the market this year, or even 40% next year,” Durant added.

BHP, whose global portfolio includes stakes in copper and coal mines in Chile, Peru and Colombia, expects global copper demand over the coming 30 years to be double that in the past 30.

For nickel, the increase could be fourfold, chief commercial officer Vandita Pant was quoted as saying by Reuters, while global commodities trader Trafigura warned of possible significant deficits for copper, nickel and cobalt as demand rises.

Limiting global warming to 2.0 degrees C will require 270,000t additional cobalt, 2.6Mt lithium carbonate, 19Mt copper, 1.7Mt nickel and 29Mt aluminum by 2030, according to consultancy Wood Mackenzie.

“The supply gap represented by the uncommitted proportion of the potential 2030 market represents a major opportunity for investment, with the associated tonnages being truly transformational when set in the context of current market size,” the company’s vice chair of metals and mining Julian Kettle said last month.