Supply security must be a priority
Net zero emissions targets and the energy crisis have brought the need for secure supplies of critical minerals into sharp focus. As with any global supply issue, economic drivers are intertwined with government regulation and political strategy. The current UK energy crisis places additional pressure on the need to establish alternative and affordable energy sources.
Such need leads to an element of isolationism – particularly in countries where there are untapped resources which are capable of national exploitation. In the context of unveiling the EU's Critical Raw Minerals Act, Ursula von der Leyen stressed the need for the EU to increase production in addition to diversification of supply. This was seen in some quarters as a challenge to both China and the USA, with the latter adjudged to have stolen a march through the Inflation Reduction Act.
The EU and US have since achieved a degree of rapprochement and collaboration – though the extent of this remains to be seen and it is not entirely clear whether long-term co-operation will be possible in the face of supply challenges. More recently, the Prime Minister has stepped up the UK's efforts to negotiate a renewal of the special relationship with Joe Biden to foster mutual action on critical minerals supply, adding to the existing statement of intent with Australia to support the critical minerals sector.
Alongside this shifting geo-political backdrop is the commercial market. The situation here is quite different. Governments rarely thrive in the face of uncertainty and it is unarguable that the world is living through a period of unpredictability. But, for as long as commodities have been traded, there have been profits to be made on margins in times of volatility.
Securing supplies of commodities that are likely to see significant price rises as governments attempt to deliver on net zero obligations can be achieved in a number of ways – from traditional financing in developing jurisdictions to equity stakes in mines.
Such investments are, of course, never risk free. The potential for governments to implement export controls of critical resources are ever-present and often used, whilst nationalisation is also a threat. In May, for example, the Chilean government moved to take state control of lithium projects within the country. In developing countries, meanwhile, corruption and conflict are twin dangers, particularly in areas where mining has already led to environmental damage and human rights abuses.
The environmental effects of mining cannot be ignored – anymore than the social impact and local opposition to mines can be. However, experience suggests that important as they are, none of these factors will be material deterrents to investment at the right price.
No commentary on this subject would be complete without acknowledging the role of China – both as a producer and user of critical minerals. China is estimated to be the biggest producer (either as a raw material or refined product) of 12 out of the 18 minerals on the UK’s critical list and it has form for restricting access to critical minerals as a diplomatic bargaining tool – no doubt one of the driving factors behind the recent US/Japan trade deal.
Those with long memories will recall that China's relationship with Russian oil goes back over 30 years. Given the current political climate, their potential cooperation on critical minerals is on the minds of many countries. In particular, whilst global commodity houses are restricted in their access to Russian critical minerals by the impact of extensive economic sanctions, Chinese state-owned enterprises face no such limitations.
Whilst it is true that today's trading world is much more heavily regulated than the oil trading markets of fifty years ago, there are eerie similarities between the situations. Global demand and the emergence of new supply sources in developing countries in need of income make a price boom seem inevitable. This creates the potential for trading houses to make impressive profits, but the geopolitical impacts of such a price boom remain uncertain.
This is not the first time that the world has faced an energy crisis and time will tell whether lessons from history have been learned or whether mistakes will be repeated. Governments need the current global production capacity of critical minerals to increase significantly – possibly by as much as 450% - to meet net zero targets. There is an opportunity to pre-regulate the mining and import/export of critical minerals to the benefit of all of those involved. Whether this will happen remains to be seen.
Sarah Taylor is a Partner at international law firm HFW specialising in international commodity trade and shipping.
