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A Game of Geopolitical Strategy

As the clock ticks down to 2050, governments are staking their claims to critical minerals.

In facilitating the climate transition, critical minerals are worth their weight in gold and they are set to become even more valuable over time. As demand for low-carbon technologies like solar energy and wind rises, so too will demand for critical minerals.  

The International Energy Agency (IEA) estimates demand will double by 2030 compared to 2021 levels, with metals like copper expected to see an increase in absolute volume demand from around six million tonnes (Mt) per year to 11 Mt by the end of this decade. The IEA noted that an onshore wind plant requires nine times more critical minerals than a gas-fired power station, and an electric vehicle (EV) six times more than a traditional car.  

Control over critical mineral reserves, therefore, will be crucial.  

“Supply vulnerability is the key factor in the growing movement of governments trying to secure access to critical minerals,” says Jonathon Smith, Associate Director of ESG Research at Sustainable Fitch.  

Further, if Russia’s invasion of Ukraine taught us anything, it’s that being dependent on a singular country for energy security – or, in this case, mineral security – is rife with geopolitical risk.  

China is currently one of the largest producers and suppliers of critical minerals in the world. It accounts for over 80% of the global rare earth elements (REEs) supply. It also refines 68% of the world’s nickel, 40% of its copper, and 59% of its lithium. While China does not have large reserves of cobalt, Chinese enterprises have invested in cobalt mines and own 15 out of the 17 cobalt mining operations in the Democratic Republic of the Congo (DRC). The country further holds 78% of the world’s manufacturing capacity for EV batteries, most of the world’s production of solar panels, and over three-quarters of existing lithium-ion battery factories.  

Tensions have long been brewing between the US and China, with the latter’s dominance over critical minerals appearing to be the latest point of contention.  

“The US became interested in critical minerals from a geopolitical point of view, as it woke up and took notice of China making moves to secure critical minerals across different jurisdictions,” notes George Cheveley, Portfolio Manager and Metals and Mining Specialist at asset manager Ninety One. 

Western governments are starting to take action, with the US leading the way. Last year, President Joe Biden signed the Inflation Reduction Act (IRA) into law, complete with US$369 billion in tax incentives and subsidies to upscale the domestic manufacture and production of low-carbon technologies and solutions, including the domestic procurement of critical minerals for EV batteries. 

Cross-jurisdictional negotiations and agreements are well underway as governments scramble to secure a foothold in the critical minerals race.  

“This has resulted in a more unpredictable policy environment and loyalties’ frameworks for private companies and investors, impacting mid- and long-term operations, as well as commodities prices,” says Tamara Tisminetzky, Director of ESG Research at Sustainable Fitch.  

“We expect an increase in interventionist and protectionist trends by exporting countries, and, as a result, some consolidation across the mining industry seems likely.” 

Although the critical minerals landscape remains full of uncertainty for investors, experts speaking to ESG Investor agree that, given the importance of these materials in the race to net zero, the landscape that emerges will be one full of opportunity. 

New alliances 

The US IRA requires 40% of the critical minerals in an EV battery to be sourced domestically if the corporate is to receive a tax credit equal to 10% of the cost of production. Eligible critical minerals include aluminium, graphite, lithium, manganese, and nickel.  

It’s an appealing offer for automakers as they funnel more of their resources into EV production, with some companies choosing to relocate their operations to benefit.  

In February, Audi announced its plans to build a factory in the US to take advantage of the IRA’s tax incentives and subsidies.  

But the US has also recognised that it can’t compete on the global stage alone.  

“There is still a lot of uncertainty as to how [the IRA and its subsidies] will work in practice,” says Cheveley from Ninety One.  

“It won’t be so simple as companies only being eligible [for incentives] if they relocate to the US, because other countries can also be eligible through free trade agreements (FTAs).” 

In recent months, the US has been forging strategic critical minerals alliances with other countries, establishing FTAs in a bid to reduce global dependence on China for key transition materials.  

In March, the US and Japan entered into a bilateral agreement, with both committing to strengthening supply chains and promoting EV battery technologies. The deal also allows critical minerals from Japan to count under the US IRA’s sourcing requirements for EV tax credits, which will unlock US$7,500 per vehicle.  

India was also inducted into the Mineral Security Partnership (MSP), a US-led collaboration between 14 countries to catalyse public and private investment in critical mineral supply chains around the world. The US and India have additionally announced an identical partnership to the one agreed with Japan.  

Last month, Australia and the US reached an agreement to coordinate their critical minerals policies and investments to support the industry’s growth and contributions to the low-carbon transition.  

Australia is already a big player in the industry, mining over half (53%) of the world’s lithium – the majority of which it currently sells to China. The US-Australia partnership may encourage the latter to detangle from China.  

Think tank the Grattan Institute has estimated that, with continued support from investors and policymakers, Australia’s critical minerals industry will eventually outstrip coal, contributing US$400 billion by 2050.  

Last year, the Australian government committed A$250 million (US$167 million) in loans in support of the country’s biggest independent lithium miner, Pilbara Minerals, which recently approved a lithium-related expansion in western Australia.  

Filling supply gaps 

Other jurisdictions have been more cautious to form a critical mineral alliance with the US.  

“The world is competitive, and the IRA has clearly spurred jurisdictions like the EU to look at their own access to critical minerals and consider whether they need to be taking similar steps,” Cheveley tells ESG Investor.  

In direct response to the US IRA, the European Commission proposed the Net-Zero Industry Act (NZIA) in March, which aims to facilitate the expansion of domestic manufacturing capacity across net zero technologies to improve Europe’s energy resilience and security.  

The NZIA will look to improve conditions for investment in EU-based net zero technologies by enhancing information, reducing the administrative burden to set up projects and simplify the permit-granting process. It also intends to boost diversification of supply for net zero technologies, accelerate the capacity of CO2 storage sites across the bloc (reaching an annual 50 Mt growth in capacity by 2030), set up Net Zero Industry Academies to enable a just transition, and allow member states to install regulatory sandboxes to test net zero technologies and stimulate innovation under flexible regulatory conditions.  

Additionally, the Commission put forward the Critical Raw Materials Act to leverage opportunities offered by the Single Market and the EU’s external partnerships to “diversify and enhance the resilience of EU critical raw material supply chains”.  

It outlines benchmarks for domestic capacities along the strategic raw material supply chain by 2030, including at least 10% of the EU’s annual consumption for extraction, 40% for processing, and 15% for recycling.  

Part of the strategy also involves the EU diversifying the imports of critical raw materials and further developing strategic partnerships.  

“Reliable and long-term access to critical minerals and the transition towards a low-carbon economy go hand-in-hand,” says Smith from Sustainable Fitch, noting that, from this perspective, legislation like the NZIA and Critical Raw Minerals Act “makes sense”.  

“However, the reality is that few countries, if any, have all the required critical minerals needed to independently decarbonise their economies, so the alliance building we’ve begun seeing between various countries on critical minerals is a necessary component of ensuring any supply gaps in domestic production and processing can be filled by reliable suppliers.”  

Think tank Bruegel noted that Europe’s main exposure to critical raw minerals (CRMs) is currently through its imports of manufactured products.  

In 2021, for example, the value of the permanent magnets imported by the EU was 12 times greater than the value of imports of all types of rare earths combined,” the report said.  

The value of imported solar panels was 13 times greater than the value of imported silicon, with only 10% of EU demand for solar panels being met domestically, it added. The value of imported lithium batteries was 75 times greater than imported lithium. 

This all highlights that the EU does not currently produce enough of its low-carbon products domestically, at great cost, said Bruegel.  

The EU has been focused on adopting an international strategy to secure its critical minerals supply chain.  

In 2021, the bloc announced a strategic partnership with Canada, with both jurisdictions agreeing to enhance collaboration on science, technology and innovation, as well as upholding environmental and social standards across critical minerals’ value chains. 

In more recent months, the EU has appeared to come down on the side of the US, with the Commission adopting its negotiating directives for a critical minerals agreement (CMA) between the two jurisdictions. The CMA would ensure that, as an ally, the EU is granted a status equivalent to US FTA partners pursuant to the IRA, meaning that EU-based companies will be eligible for subsidies.

The Commission said that the agreement will also help to facilitate increased cooperation to make the critical raw materials sector more sustainable by encouraging high environmental protection and promoting fair labour rights.   

Crystal clear  

Clarity is essential for private investors and corporates looking to capitalise on potential opportunities throughout the critical minerals value chain.  

The IEA has outlined its six recommendations for a comprehensive approach to mineral security for policymakers, which include sending strong signals to private investors about the importance of the climate transition and clean energy technologies and materials by creating conditions “conducive to diversified investment in the mineral supply chain”.  

Additionally, the IEA urged policymakers to enhance supply chain resilience and market transparency, scale up recycling of critical minerals, and strengthen international collaboration between producers and consumers.  

The IEA further emphasised the importance of upholding environmental and social values in the development of minerals’ focused policy.  

“Critical minerals industries must be sustainable for the long term,” agrees the Investor Group of Climate Change (IGCC).  

“Leading investors are generally long-term custodians and therefore understand that the full suite of ESG factors effect risk.” 

Cheveley from Ninety One adds that governments need to provide more clarity around permitting for critical minerals-related projects.  

“It’s not just about how much money [investors] can give – the whole package has to be clear,” he says. “What are the rules around permitting? What support will governments give if there is a problem? How are they going to offer that support?” 

The IEA’s analysis suggests that it takes 16.5 years on average to move mining projects from discovery to first production, with 12 years of that average needed to line up all aspects of permitting and financing. With a 2050 deadline looming, the world doesn’t have the luxury of time.  

“Potential projects should not be exempt or fast-tracked through regulatory review and proper due diligence, despite the urgent need and desire to grow supplies,” warns Smith.  

“Achieving sustainable critical mineral development, which means mitigating impacts to air, land and water while also protecting communities and other stakeholder groups, would mean being able to grow supplies while also doing no significant harm to society and the environment.” 

Feeling the heat of growing pressure for a speedy uptick in critical minerals supplies, the Norwegian government recently proposed opening its waters to deep sea mining (DSM), which has a whole host of environmental concerns attached to it. Only time will tell whether other governments will choose to explore this potential new frontier of mining.  

“Investors would surely benefit from governments’ support in providing clear national plans and studies that outline vulnerabilities in international supply chains,” adds Tisminetzky.  

“These considerations should include geopolitical, environmental, and social elements, which would help investors’ decision-making on their diversification strategies.”  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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