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As European firms work to cut Russia-produced metals and other critical minerals out of their supply chains, experts warn that alternative options are scarce and rife with environmental, social and governance (ESG) risks.

In recent months, concerns have been mounting in the European Union over supply disruptions to critical minerals such as refined copper, nickel and palladium, given their role in producing modern and renewable technology.

Copper is crucial in the manufacture of wind and solar power technologies, while nickel is vital in producing electric vehicles (EVs), selenium is used to make solar panels, and palladium is needed by the automotive manufacturing industry.

The EU has so far refrained from imposing direct sanctions on Russian producers of critical minerals, but western companies have increasing engaged in “self-sanctioning” amid heightened reputational and operational risks.

European importers, such as aviation giant Airbus, have intimated they will adopt a dual-sourcing approach as they work to shift towards new suppliers globally.

But in a report published in late July, strategic consultancy firm Verisk Maplecroft says such efforts could prove to be difficult, with countries across Asia, Africa and the Americas – where many of these minerals are produced – lacking in terms of key ESG metrics.

“EU sanctions against mined and refined materials are a real possibility,” the report says. “Taken in tandem with ongoing conflict-related disruptions and recycling rates hitting a ceiling, new sources for minerals such as potash, palladium, refined copper and refined nickel will be required urgently if the war continues.”

“This will force companies into lesser-known markets where the regulatory environment is not as mature,” it adds.

 

Copper concerns

The copper market is a source of heightened concern, as Russia accounted for the vast majority of the EU’s refined copper imports in 2020 (nearly 70%) and holds about 7% of the world’s recoverable copper ore reserves, Verisk Maplecroft says.

According to its analysis, a sizeable amount of copper is produced in mines across Chile, Peru and Mexico, which together account for nearly half of global output. However, all three countries score as “high” or “extreme risk” for key ESG indices, such as water pollution, biodiversity and indigenous rights.

Nickel is also reliant on Russia, with a third of the EU’s refined nickel imports in 2020 originating in Russia. But again, efforts to rejig supply chains could clash with ESG goals.

“Half of global nickel production occurs in Indonesia and the Philippines, both of which have significant reserves. However… mining in both these countries is highly exposed to ESG risks, including high levels of biodiversity loss, water pollution, land grabs and abuse of indigenous peoples’ rights,” the report says.

There are hopes that estimated nickel reserves of 7.1 million tonnes in the French Overseas Territory of New Caledonia could offer a new source of supply, though some fear mining could threaten a wealth of local animal species.

“Tesla’s long-term strategy for securing future nickel supplies focuses on New Caledonia. The company has promised to work directly with miners to minimise its environmental impact, but the sector’s performance is clouded by a small number of irresponsible operators, making it a focus for the island’s independence campaigners,” the report says.

For the European automotive industry, a dependence on Russian palladium could prove to be a key supply chain weakness in the coming year, with the metal used to make catalytic converters. At the same time, the aviation sector is grappling with its exposure to titanium produced in Russia.

Russia currently yields about 40% of the world’s platinum group metals, including palladium, most of which are imported into the EU.

As the world works to shift away from its fossil fuel-intensive past and embrace cleaner technologies, such as EVs and wind turbines, demand for critical minerals is set to boom in the coming few decades.

In a 2021 report, the International Energy Agency (IEA) estimates consumption of critical minerals could grow sixfold by 2050, driven by 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, as their conventional counterparts, while an onshore wind plant needs nine times the minerals and materials of a gas-fired facility.

Even before the Ukraine crisis erupted, financial institutions had voiced concern over the detrimental impact of critical mineral mining on the environment – despite the role of these commodities in charging the energy transition.

Thomas Hovard, chief commercial officer at Danish ECA, EKF, told GTR earlier this year that the agency is limiting its support for the sector due to such concerns.

“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.”