The Idea of a Circular Economy for Resources is Absurd
That’s the tweet, now let’s look through the math
There’s this concept of the “circular economy” as part of the energy transition, decarbonization, & electrification trend. It’s one of the biggest reasons the eucalyptus paradox exists. It’s a fantasy that recycling metals is going to make a material difference anytime soon in accomplishing the tangible real world effects of the super trend and not more holes in the ground (or vacuums on the deep sea floor).
Case in point: Redwood Materials just raised a $700MM external round last week
https://www.redwoodmaterials.com/press/redwood-materials-announces-700m-external-investment-round
The “post-funding round” valuation is reportedly $3.7 billion. Put another way, Redwood raised a $3Bn pre-money round with a literal who’s who of international flagship investment institutions.
What does Redwood Materials do you wonder? Well let’s just take the mission statement straight from the website:
Redwood’s mission is to build a circular supply chain to power a sustainable world and accelerate the reduction of fossil fuels. This focus is critical to the future of transportation and the electric grid.
Seems pretty clear right? Why mine the earth for more battery metals when we can get them from recycling old batteries? A very commendable mission in the koala’s eyes! And recycling does have a future role to play in the supply chain. The koala has had many debates about scrap copper supply and scrap steel supply in its career when trying to figure out the next year’s S&D balance.
But have we all forgotten how to do basic math? I’m actually being serious.
Take a new mineral/commodity that we will call Eucalyptus. And Eucalyptus has a very steady production supply of 100 units per year. And, and this is a very important detail, unlike say oil, coal, natural gas, or wood, it is not “consumed” when it is utilized, there is scrap eucalyptus at the end of its useful life in its first application.
We can do this exercise one of two ways, we can say of those 100 units in year 1, 5 units fail every year such that by year 20 every unit has become scrap, and then after 20 years of production you have 5*20 = 100 scrap units per annum, or we can just say after 20 years Eucalyptus becomes scrap. Same outcome, in 20 years from year 1, you will have 100 units of scrap eucalyptus every year in addition to any virgin eucalyptus production.
Well here is the problem with saying circular is the solution, simple arithmetic. Assume various annual growth rates for commodity demand growth over 20 years, simple math is this:
IF you can recover 100% of eucalyptus scrap and recycle it with 100% eucalyptus recovery, you still need all 100 units of virgin eucalyptus production to satisfy annual demand if eucalyptus demand has grown at only 3.5% per year!
Go check the lithium, cobalt, nickel, copper growth CAGRs being contemplated over the next 5, 10, 20 years if this supertrend is to be a success.
And we are not going to touch on depletion of virgin production resources here…
Or the returns required to incentivize new virgin production…
Or the permitting and regulatory hurdles to be climbed…
Or the simple issue of actually finding new economic sources of eucalyptus…
Go into excel and just play around with these figures, it’s just simple math if we are aiming to displace all or most of the energy units currently provided by oil, natural gas and coal, we are going to have insane battery metals demand growth. Incremental recycling as a supply band aid won’t matter for decades until this demand growth has gone through its first useful life application and been scrapped.
I’m going to keep this short and sweet but want to stress this hypothetical we are assuming all material is available as scrap with 100% recycling recovery. We don’t have a new “spec” for eucalyptus in its main applications (sorry you don’t use the same steel alloy mix in several applications you used 20 years ago, for example…that’s led to demand growth for some specialty alloying elements). We assume the recycling is low cost and easy, straight forward.
And yet, we still need virgin production growth or at least investment to maintain productive capacity on any sort of modest demand growth trajectory.
Now this is where we get into some really weird parts of the climate change/decarbonization world about “de-growth” and some really cynical Malthusian thoughts about there being too many humans (Bill Maher, who normally I rate highly, had a rant about this last week on his HBO show). But the reality is this, as Stuart Kirk pointed out at the FT conference in May 2022 – those arguments have been around for centuries and somehow humanity has prevailed.
I believe the Eucalyptus Paradox is one of the biggest problems facing the very real and practical mission of providing humanity with clean air.
Especially in the biggest metropolises as the efficiencies of major cities through shared services and the opportunity for the younger generations (both professional and personal) will continue to grow existing cities and create new major mega-cities we cannot even fathom today.
The miracle of Singapore, the timelessness of New York City, don’t be afraid of the future.
And don’t say to me “oh koala, no one will own their own cars or homes anymore, it will all be shared/communal and we will get greater asset utilization”. After the last two years in the west, there is no chance anyone of means is going to forgo optionality after living through a period of immense economic, social, and emotional volatility. You may have to buy an EV instead of an ICE vehicle, but you will still own a vehicle. You will still have the urge to one day own a house or apartment.
While it is acknowledged in Economics classes due to human innovation most generations, barring a major global conflict, have had a better quality of life then their parents and grandparents, one VERY important detail isn’t always brought up: we tend to consume more commodities as a result of said progress.
The real prices tend to deflate overtime due to innovation enabling us to reduce the cost of production and thus pull previously uneconomic resources into the economic part of the cost curve, but the historical data is clear, we tend to use more of commodities over time.
And when we don’t use a commodity more over time, demand does not tend to stay flat. Horse demand went down REAL quick as the automobile was adopted in an accelerated fashion by humanity. But think about that for a second, the collapse of the horse & buggy came from an innovation that required iron, coal (for steel), rubber, aluminum in massive quantities. In fact, typically speaking the thing that destroys demand for a commodity in a violent rapid fashion is the rapid adoption of a DIFFERENT commodity.
And I say that because this is not just a battery metals question, this is a steel issue, an aluminum issue, in fact just in general, demand for all of these commodities will continue to grow over time.
It's a random sidebar but we must acknowledge how cynical so much of the climate change and ESG messaging is about the world. People want to own things, to have economic security, to have progress and security in their lives. It varies between different cultures but the primal human instinct to protect and provide for yourself and your family is hard wired into all of us no matter your political and social ideology.
Electrification/decarbonization is a very logical mission for humanity in the 21st century. But while I relish the increased potential profitability for me personally from a bigger supply/demand deficit longer term in all these critical materials, the present energy crisis with “old energy”/fossil fuels show us that there are real world consequences to indulging the foolish evangelical fancies of the religiously devout in a movement. It’s time to be a team player and call a spade a spade.
We need to seriously evaluate new mining projects with a common understanding that they are necessary. Both for collective humanity but also as long as humanity has differences, it is important to have a secure supply chain for those foundational building blocks of our society.
This isn’t to say Pebble with a tailings dam that if memory serves me correct will be bigger then Manhattan is a good idea. But maybe Rosemont shouldn’t have turned into a permitting/court thunderdome!
I recognize recycling of scrap metals/chemicals has a role to play in the future supply chain, but we are doing ourselves a disservice in the western world masturbating to the fantasy that recycling is our salvation instead of prioritizing virgin production units whether brownfield or greenfield if we really truly as a society believe in the urgency of the electrification/decarbonization megatrend.
And as for thermal coal, the climate change ESG boogie man commodity, well until the Eucalyptus Paradox is resolved, how will there be enough battery metals, enough batteries, enough nuclear reactors, enough alternatives such that it can go the way of the horse & buggy?
As long as the Eucalyptus Paradox exists, it’s going to be a really long time.
This is a great write up and so true.