Author: Kapil Narula
Energy Review, Vol 5. Issue 04. 2023
Critical minerals are non-fuel minerals that are crucial for a country's economic and national security but are at risk of supply chain disruption. Examples include copper, graphite, lithium, rare earth elements, cobalt, and platinum group metals. These minerals are essential for producing a range of items, such as wind turbines, electric vehicles, missiles, medical imaging equipment, and night vision goggles. As a result, the availability of critical minerals plays a crucial role in national security, economic growth, and the transition to clean energy. Countries are devising strategies for critical minerals to lessen supply chain vulnerabilities and increase security. This article highlights the growing significance of critical minerals for national security, economic prosperity, and the shift to clean energy. Increasing Supply-Demand Gap The supply-demand gap of critical minerals in widening. This is evident from the exponential increase (difference between their average prices in 2020-21 and peak price in 2022), in the price of cobalt and lithium, which have shot up by 3 and 12 times, respectively, before cooling off in the first quarter of 2023. The IEA forecasts that driven by the clean energy transition, the overall demand for critical minerals could increase by as much as six times by 2040, with the demand for lithium, graphite, cobalt and nickel increasing between 24-50 times in certain scenarios. Escalating Geopolitical Risks This increasing demand has triggered a geopolitical competition between countries to gain access to these resources. However, mining, processing and refining of critical minerals is highly concentrated in few countries, notably China which contributed to a high global share of mining of rare earths (60 per cent) and its processing (85 per cent) in 2019. China also accounted for a high share of production of cobalt (65 per cent), lithium (58 per cent), copper (40 per cent) and nickel (35 per cent). This concentration of production and processing of critical minerals makes their supply chains vulnerable to disruption, especially from geopolitical risks and may lead to misuse of dominant market position. Diversifying the critical mineral supply chain, has therefore become an important strategic and security concern for countries. Country Roadmaps and Critical Mineral Strategy In response to the growing strategic and economic importance of critical minerals, many countries such as the United States, European Union, Australia, Japan, Canada have formulated critical mineral strategies. These strategies acknowledge the growing role and importance of critical minerals in future plans of these countries and outline important domestic measures to develop the sector. The Inflation Reduction Act (IRA) of 2022, introduced in the US provides several incentives to support domestic supply chain for critical minerals. This includes advanced manufacturing production tax credit for domestic mining and refining of critical minerals and production of components. Regional sourcing requirements have also been introduced, such as, not less than two-fifths of the critical minerals used in EV batteries will have to be extracted and processed in the US or with a free trade agreement partner or recycled in North America with this threshold increasing to 80% in 2026. Similarly, the European Critical Raw Materials Act, released in March 2023, plans to domestically produce at least 10%, process at least 40%, and recycle 15% of the share of annual consumption of critical raw material in the EU. This is expected to lead to a significant increase in investments for exploration, development of new mines and infrastructure, improved technology for processing, and recycling of critical minerals, in the next few decades. Adoption of a national critical mineral strategy and roadmap would be the next logical step for countries such as India, Russia, China and South Korea which have global geopolitical ambitions, in a bid to secure security of critical mineral supply. Emerging Geopolitical Alignments Multilateral and bilateral partnerships are one of the main pillar of mineral strategy of a country as it allows diversification of suppliers and lowers the supply chain vulnerabilities. International partnerships, such as the 'Critical Minerals Mapping Initiative’ (2019) between three countries, 'Mineral Security Partnership' (2022), between 11 OECD countries; ‘Sustainable Critical Minerals Alliance’ (2022) between seven developed countries are some recent examples. Australia, Canada and the United States are actively engaged in such coalitions and are members of all three alliances. Countries are also engaging in strategic partnerships bilaterally, such as, Canada-U.S. (Joint Action Plan on Critical Minerals), Canada-EU (Strategic Partnership on Raw Materials), Canada-Japan (Sectoral Working Group on Critical Minerals), U.S-Australia (Critical Minerals Collaboration), Australia-Republic of Korea (MoU on Cooperation in Critical Mineral Supply Chains), United States-Japan (Critical Minerals Agreement) and UK-Australia, to build resilient critical mineral supply chains. Developing a ‘friend-shoring’ strategy, which implies partnerships with countries that share similar values, geopolitical interests, and economic objectives is emerging as an important strategy to mitigate the dependence on countries that may use critical minerals as a geopolitical tool. Strong partnerships with countries having significant critical mineral reserves by joint ventures, research collaborations, and information-sharing agreements can help build more resilient and secure supply chains. Mitigating Risks and Enhancing Critical Minerals Security There are several measures that can be taken to make critical mineral supply chains more robust and secure. These include: a) Increasing domestic production and refining: Actions to increase domestic production of critical minerals in the long term include, investing in mineral exploration through geological surveys, creation of mineral resource maps, developing mining infrastructure and setting up refining and processing industries. b) Diversifying supply sources: Reducing overall dependency on critical mineral imports and reliance on any one supplier for raw mineral or processed material lowers the threat of supply chain disruption. Developing government to government partnerships with smaller countries having critical mineral reserves is an important strategy for diversification of suppliers. c) Developing stockpiles: Building strategic stockpiles of critical minerals can help to provide a buffer against supply disruptions and price fluctuations. The minerals which need to be stockpiled and the conditions for drawing on these reserves need to be clearly specified to ensure strategic and optimal use of stockpiles. d) Attracting investments: Financial incentives such as tax breaks for investment in mining and refining infrastructure, establishing joint ventures, infusion of public funding and clear tax guidelines help in attracting domestic and foreign capital. Higher incentives leads to better financial viability and allows companies to invest in mining projects with long term horizon. e) Developing technology: Investing in research and development in the critical minerals sector can help to drive innovation and improve the efficiency and sustainability of mining and refining processes. Funding for research and development improves the productivity of mining in the long run and can lead to the development of substitutes. f) Promoting recycling: Recycling and reuse of critical minerals can help to reduce the primary production of minerals. Technologies to improve the recovery of critical minerals from end-of-life products, and promoting circular business models that increase the reuse and recycling of materials are essential for bridging the growing supply-demand gap. Secure critical minerals supply chains are essential for the national security of a country and the transition to a low-carbon economy. In the short term, the reliance on imports for critical minerals is likely to continue and hence geopolitical influences and alignments will play an important role in securing trade partnerships with supplier countries. Considering the strategic importance of critical minerals, a long term perspective on developing a secure and sustainable supply of critical materials will go a long way in meeting clean energy transition ambitions. (Dr. Kapil Narula is a Consultant with the United Nations and a co-author of T7 and T20 policy briefs on critical minerals.) ■□■
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