Over the next 25 years, demand for critical minerals like lithium, cobalt, and rare earth minerals will increase sixfold if countries are to reach their emissions reduction targets. Critical minerals are essential to the production of low-carbon technologies, such as electric vehicles, photovoltaic cells and wind turbines. The UK’s Integrated Review Refresh, released yesterday, announced a suite of new initiatives for critical minerals. Meanwhile, the European Commission will publish cornerstone legislation in the form of the EU Critical Raw Materials Act (CRM) this week. Businesses and investors should engage with governments now to understand the trajectory of policy and regulation and the impact this might have on commercial considerations.
Europe and the UK do not have the domestic resources to meet producer demand for critical minerals. Securing supply from other geographies is now a key medium-to-long-term priority.
Beyond the very practical issues governments will need to resolve to secure supplies of critical minerals, geopolitics will continue to play a significant role in shaping the market.
China is overwhelmingly dominant in critical mineral supply chains, processing 90% of the EU’s rare earth metals and 60% of its lithium. But this reliance on a single market is risky – by way of example, in 2010 the Chinese Government imposed a 40% reduction in quotas for the export of rare earth metals, causing prices to rise outside of China until the resolution of the WTO dispute case in 2014.
Similarly, the EU relies on one EU-based company for the supply of all hafnium and strontium, which are used in aerospace engineering and nuclear reactors, and depends on single markets for other supplies (such as Turkey, which provides 98% of European Borates, and Kazakhstan, which supplies 71% of phosphorus).
These highly concentrated dependencies increase the risk of significant supply shocks.
Raw Materials Act Enter Stage Left
The disruption to energy and commodity markets following Russia’s invasion of Ukraine means that the security of energy supply is now top of mind for European Governments. The conflict has triggered a string of investment and regulatory interventions by the UK, EU, and US. The same mentality is now being applied to critical minerals.
The CRM is expected to set targets for domestic production, put limits on country import market shares, and increase recycling ambitions. The EU is also looking to label European-based mining operations as Projects of Common Interest (PCI), which would accelerate permitting procedures to speed up planning and unlock key funding.
The CRM follows the UK Critical Minerals Strategy, published July 2022 and ‘refreshed’ as part of the UK’s Integrated Review, released yesterday. It announced new funding, launched the UK-Canada supply chain dialogue and committed to new strategies on supply chains and semiconductors.
Both the UK and the EU will need to make swift progress to compete with the US, especially in the context of the $369bn Inflation Reduction Act (IRA), which set a strong precedent for state intervention to encourage investment in green technology.
While legislation and subsidies will be the foundation of government policy, policymakers are promoting groups such as the EU’s European Institute of Innovation and Technology Raw Materials, UK Task & Finish Group on Critical Minerals Resilience (announced this week) and UK’s Critical Minerals Intelligence Centre in the hope that they will help drive forward standards, confidence, and investment in this growing industry.
Additionally, to help combat unstable and concentrated critical minerals supply lines, the EU has finalised new trade arrangements with Chile, Mexico and New Zealand. It is also looking to agree on deals with other significant suppliers, including Australia, Kazakhstan, and India. The EU has also acted unilaterally to ease trade barriers for a range of critical materials, dropping import tariffs until December 2025.
Other developments such as UK-Canada Critical Minerals Supply Chain Dialogue, the American-led Minerals Security Partnership with Western allies and Japan, as well as the EU’s proposed ‘Critical Minerals Club’, will further strengthen efforts to develop stronger and more secure resource supply lines. Focus will centre on current EU-US critical mineral talks for a signal of American appetite for sharing the benefits of IRA subsidies with allies.
2023 will see further government intervention as policymakers attempt to boost domestic production and processing of critical minerals. This will include the anticipated EU Net-Zero Industry Act (to be released alongside the CRM), the potential establishment of the European Sovereignty Fund, and tweaking EU state aid rules to make it easier for governments to subsidise the green transition on a scale matching the US and China. In the UK we expect the Government to bring forward similar measures after the Spring Budget.
Resource-intensive future technologies will put pressure on governments and companies to ensure that appropriate environmental, social, and governance (ESG) metrics are in place for sourcing and processing materials.
Illegal mining, poor labour practices, and unclear guarantees of origin all risk undermining efforts for a clean energy future. Cobalt extraction in the DRC has already been in the spotlight due to concerns about safety and the use of child labour, and British and European ESG standards will invariably clash with third-country priorities to monetise resources.
The UK’s domestic Sustainability Disclosure Requirements (SDR) regime, announced in October 2021, introduced requirements for UK-based funds and assets to meet a strict set of criteria to identify as ‘sustainable’. Likewise, the EU’s Corporate Environmental Reporting Directive requires large and/or publicly listed companies to report impacts on the environment and people. The EU also has its Supply Chain Act, which makes companies liable if their supply chain includes a violation of human rights or environmental protections.
Dig for Victory
The increasing focus on critical minerals by governments in the UK and EU means that industry is at a crucial juncture. Pledges to decarbonise economies will need to be backed up with new critical mineral-rich low-carbon technology and infrastructure.
Although government action in this area is still in its early stages, the key pillars of enhancing domestic capabilities (production, recycling and refining); collaborating internationally with like-minded allies to source key materials on secure supply chains; and promoting transparent international markets have set out a roadmap for development.
With legislation coming thick and fast, governments need to get the strategy and incentives right across a whole range of policy areas, including skills, trade, R&D and national security. Business should engage with government sooner rather than later to encourage frameworks that allow the sector to grow.
Chris Hudson is a Manager based in London. He has a background in freight and commodities. Katie Whitting is a Director based in London. She advises clients on policy and political issues with a focus on national security, investment and geopolitics. Katie was a career diplomat with the Australian foreign service. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.