Demand for critical minerals and metals such as cobalt, copper, lithium and graphite, which are vital in the manufacture of clean energy technologies, is set to soar. Felix Thompson examines how governments are working to ensure their domestic companies avoid supply issues in the future, and why export credit agencies are set to play a significant role in these efforts.
As the world works to ditch petrol-powered cars, churn out wind turbines for onshore and offshore projects, and manufacture vast numbers of new solar photovoltaic cells, business is set to boom for mining companies active in the critical minerals and metals sector.
In a report published last May, the International Energy Agency (IEA) estimates consumption of critical minerals could grow sixfold by 2050 amid surging demand linked to the energy transition.
The IEA’s analysis says electric cars alone require six times the amount of minerals and metals, including copper, graphite, nickel and lithium, than their conventional counterparts, while an onshore wind plant needs nine times the minerals and materials of a gas-fired facility.
The agency warns unless governments take swift action, there may simply not be enough critical minerals to go around.
“Today’s mineral supply and investment plans fall short of what is needed to transform the energy sector, raising the risk of delayed or more expensive energy transitions,” the IEA argues.
“In a scenario consistent with climate goals, expected supply from existing mines and projects under construction is estimated to meet only half of projected lithium and cobalt requirements and 80% of copper needs by 2030,” it says.
The IEA adds there are “many vulnerabilities” that may increase the possibility of market shortages and greater price volatility.
One potential chokepoint is the lead time of minerals projects, which the IEA says can take over 16 years to move from discovery to first production; another is the declining quality of ore in commodities such as copper, which could drive up costs and require greater levels of energy to extract the metal.
An additional crucial factor – one which experts say is of paramount concern for the US, in particular – is the high levels of geographic concentration within the critical minerals industry.
In 2019, 70% of cobalt was produced in the Democratic Republic of Congo, while China accounted for nearly two-thirds of global production of rare earth elements that year, the IEA notes.
The level of concentration is even higher for processing operations: China’s share of refining is around 35% for nickel, 50-70% for lithium and cobalt and nearly 90% for rare earth elements.
“High levels of concentration, compounded by complex supply chains, increase the risks that could arise from physical disruption, trade restrictions or other developments in major producing countries,” the IEA says.
Against this backdrop, western countries have developed – or are developing – strategies to ensure their domestic manufacturers have a ready supply of critical minerals in the years to come.
Jane Nakano, a senior fellow at the Center for Strategic and International Studies (CSIS), says the US’ role in upstream and midstream global critical mineral supply chains has become “severely limited” due to the wider effects of globalisation and a policy-led push to shift environmentally damaging mining overseas.
But in an analysis piece published in March last year, she says the Biden administration’s emphasis on climate mitigation policies could yield a “more comprehensive strategy on critical minerals supply chains” for the country.
Since then, the prospects for American companies have become increasingly positive, with the US president having signalled his intention to prop up domestic minerals projects with funding.
As part of these measures, earlier this year Biden awarded US$35mn in federal cash to MP Materials, a developer of an end-to-end domestic supply chain for permanent magnets – vital in the manufacture of EVs and wind turbines.
“China controls most of the global market in these minerals… We can’t build a future that’s made in America if we ourselves are dependent on China for the materials that power the products of today and tomorrow,” said Biden at an event in February.
The financing followed a government-wide 100-day review of supply chains for key goods, including critical minerals, carried out by the White House from February to June 2021.
The report laid out a raft of recommendations, such as the need for the US to cooperate with allied countries to diversify sustainable sources, and expand mining, production, processing and recycling of critical minerals at home.
Elsewhere, other countries are crafting similar plans, with the goal of securing critical mineral supply chains and helping domestic clean technology manufacturers grow their business.
The UK government says it is preparing to unveil its own critical minerals strategy in 2022 as part of measures to ensure the country’s long-term security of supply.
Germany published its first raw materials strategy a little over a decade ago, and updated this in January 2020.
In a bid to strengthen these supply chains, some governments are also looking to cooperate with like-minded nations.
The Quad, a loose political alliance between the US, Australia, India and Japan, has identified critical minerals as one potential area of interest. At a meeting in Washington DC last September, the leaders of the four nations discussed how minerals unearthed in Australia could contribute to the other countries’ supply chains. “On critical minerals, Australia is one of the biggest producers, but we believe we can play a bigger role in a critical supply chain that is supporting the technologies of the future,” said Scott Morrison, the Australian prime minister, after the Quad meeting.
The leaders also discussed Australian exports “connecting up with the manufacturing and processing capabilities and end users” in India, Japan and the US, Morrison said.
“The commercial dimensions of the critical minerals market mean it is a difficult place to get established,” he added in a statement. “We want to ensure that Australia’s resources producers do get established so they can link up with others in our supply chains in a free and open Indo-Pacific.”
Growing ECA involvement
As governments work to strengthen their critical mineral supply chains, industry figures say export credit agencies (ECAs) are playing an increasingly central role in these efforts.
Gabriel Buck, managing director of boutique export finance consultancy GKB Ventures, says his firm has identified critical minerals as a “major market to focus on” in recent years and has started to see a significant amount of ECA business related to the sector.
He suggests there are two factors driving this trend: efforts within the ECA sector to move away from its fossil-fuel intensive past and embrace decarbonisation, as well as the huge expected demand for electric vehicles (EVs) and battery storage in the coming years.
“There are many countries with critical minerals, and they, along with project sponsors and companies in related supply chains, will all benefit,” Buck says.
“For both expansion and greenfield sites, all of these projects will require funding. Whether you’re on the debt or equity side, providers will want to see projects that are properly structured,” he says. “Even before the move towards critical minerals, about 25% of ECA industry exposure was related to mining and metals, but we do believe this will increase significantly.”
Rachel Speight, a partner at law firm Mayer Brown who specialises in project financing in the mining sector, says: “Anecdotally, we are seeing increasing interest for ECA and development finance institution (DFI)- supported deals in the critical mineral space.”
“These institutions can help to implement their government’s strategic aims in terms of critical minerals,” she tells GTR.
For some countries, ECAs are working to boost their extraction and upstream processes domestically.
In October, the Australian government launched a new A$2bn (US$1.5bn) loan facility with a view to spurring investment in critical minerals.
Funding is being provided through Australia’s ECA Export Finance Australia (EFA), with a spokesperson for the agency telling GTR any project will be considered if it supports wider government efforts to bolster Australia’s exploration, extraction, production and processing of critical minerals.
Already, EFA has approved two transactions for companies developing graphite processing projects for the supply of EV batteries, worth a combined total of US$239mn.
An agency spokesperson tells GTR it is engaged with 35 more potential projects, all at varying stages of readiness.
The EFA notes such investments will “help cement Australia’s role” in creating new emerging and green technologies, a move it hopes will reap economic benefits at home, though the spokesperson says it is “difficult for any one country to establish an end-to-end supply chain across the range of critical minerals”.
Meanwhile, for nations not blessed with wealthy deposits of critical minerals, ECAs are expected to back projects through less conventional forms of support in the years to come, experts say.
“Offtake is another key area to watch. We may eventually see ECAs supporting projects that secure the supply of critical minerals to that ECA’s home country, not just providing support on the basis of exports of goods and services,” says Meredith Campanale, a partner at Mayer Brown.
“The import security rationale is something that we have seen in the oil and gas space, for example with LNG,” she adds.
In the past, the Japan Bank for International Cooperation (JBIC), for instance, has structured deals whereby it has provided loans in exchange for oil from a non-Japanese company. The agency tells GTR it is open to backing imports of critical minerals in a similar way.
European ECAs are also eyeing up opportunities in the sector.
Lake Resources, an Australian lithium extraction company, said last year that the UK’s export credit agency had provided a “strong expression of interest” and is considering supporting 70% of the total finance required for the company’s US$1.6bn Kachi project in Argentina.
The firm said the agency’s involvement would encourage a “UK-led” sourcing strategy, allow flexibility for other ECAs to participate on the project financing, while also helping crowd in private lenders.
“A number of international banks have already approached us who have expressed an interest to be part of Kachi’s development and their interest is dependent on having a strong ECA like UKEF,” says Lake Resources’ managing director, Steve Promnitz.
Reports suggest the Export-Import Bank of the United States (US Exim) is also working to support wider government efforts in the critical minerals space, while simultaneously helping US firms – and others that could benefit US supply chains – compete with those in China.
Australian company Ironbark said in recent months that US Exim has given it preliminary funding approval for its Citronen zinc project in Greenland, with the ECA agreeing to provide US$657mn in debt subject to further rounds of due diligence and the board signing off on the deal.
The company claims the development has earned a so-called 402(A) designation, which qualifies it to secure support through US Exim’s China and Transformational Exports Programme.
Launched in late 2019, the initiative aims to help American exporters better compete with rivals in foreign countries, while also ensuring the US is a world leader in 10 sectors identified as being key for strategic purposes.
As reported by the Australian Financial Review, Ironbark Zinc has been working with US Exim on the project for the past 18 months, having initially been looking to source debt funding from Chinese state firm China Nonferrous.
Taking on Beijing is “front and centre” of US Exim’s thought process, Buck says. “I don’t see the China question ever coming up with the other export credit agencies, who tend to simply look at critical minerals as good business and a way to further their decarbonisation agenda.”
The involvement of ECAs in critical mineral mining projects can ultimately be a decisive factor as to whether private lenders will become involved, particularly with ESG risks mounting.
Human and environmental disasters continue to plague the mining sector across the developing world. In 2019, more than 250 people were killed when a dam broke at a Brazilian iron ore mine run by mining giant Vale, a disaster which saw the firm pay out more than US$100mn in moral damages.
Within the minerals industry specifically, NGOs have long warned of exploitation and human rights abuses – including child labour and fatal accidents – taking place within the Democratic Republic of the Congo’s artisanal cobalt sector.
The sizeable climate impact of mining, even for the critical minerals that will charge the energy transition, is also a key concern for some ECAs.
Thomas Hovard, chief commercial officer at Danish ECA, EKF, tells GTR the agency is currently only supporting one major domestic supplier involved in critical minerals mining supply chains globally.
“When we get involved to support a Danish company, we ensure a project has high ESG standards. We use IFC standards which are the highest, and are related to biodiversity, labour, social standards, environmental standards. It’s quite comprehensive, which is not the case with every mine globally.”
While the agency will continue supporting this particular exporter, he says it does not intend to significantly ramp up support for such projects.
“We are not trying to grow our presence in the sector. It is not an easy sector for various reasons, but we do want to support our supplier – so it is a bit of a balancing act,” Hovard says.
“Mining is definitely not a green area, but we need minerals for the energy transition. It’s a conflict, because it’s a sector with heavy CO2 emissions.”