The technological requirements of the energy transition are having a fundamental impact on how existing industries operate and where investment is focused. The role of critical minerals in this transition cannot be overstated and constitutes an integral function across industries that are adopting low-carbon aims. This global transition has also put the spotlight on the tensions between China and the US, sparking action to create separate spheres and supply chains

inspiratia insights:

• The global shift towards a low-carbon economy is heavily reliant on the availability of critical minerals, crucial for renewable energy technologies and electrification.
• Demand for these minerals is projected to surge up to six times by 2050.
• China dominates the supply and processing of many of these critical minerals. This concentration amplifies risks related to supply disruptions, trade restrictions, and geopolitical tensions.
• The US and its allies are investing in domestic production and supply chain diversification, highlighted by the Inflation Reduction Act in the US and initiatives like the Mineral Security Partnership.
• Some experts argue for a more collaborative approach. Decoupling from China could result in less effective and more expensive systems.

The global shift towards low-carbon energy sources hinges on the expansion of renewable energy projects, underpinned by the availability of critical minerals, whose demand is projected to surge by up to six times by 2050, as per the IEA‘s scenario. In this envisioned future, the energy-related resource trade will predominantly revolve around critical minerals, overshadowing the prominence of oil and natural gas.

Meanwhile, an intense global supply and demand race is unfolding, seeking to establish a low-carbon economy amidst the escalating impact of climate change and adjusting economies. At the heart of this race is China, which has long been developing its expertise and capacity to support these technologies.

The world is beginning to recognise the vulnerability of over-dependence on a single country, or single point of failure. These fears have become acute in the wake of Russia’s invasion of Ukraine, which demonstrated the exposure to risk in the realms of energy and national security.

Why are these minerals so critical?

The main pillars driving the shift to a greener and low-carbon economy are renewable energy sources crucial in electrifying energy networks and batteries supporting technologies like electric vehicles (EVs). This marks a profound shift in requirements compared to traditional fossil fuel resources. The underlying technologies within the electrification of networks are solar PVs, wind turbines and EVS, which all require more minerals to build compared to fossil fuel counterparts.

While there is no definitive global list of which minerals are considered critical, countries have lists that are constantly reviewed and updated as requirements change with advancements in technologies.

Amongst the most important critical minerals are copper, cobalt, lithium, rare earth elements (REE), graphite, and silicone. Copper is part of all those primary renewable energy sources, constituting a cornerstone for all electricity-related technologies. Batteries rely on lithium, nickel, cobalt, manganese, and graphite. RREs are also considered essential for wind turbines and EV motors, while solar PV additionally relies on nickel and silicon.

China’s pivotal role

The issue of critical minerals is not a new matter. However, rising tension between China and the US has attracted attention to the issue. These minerals are not spread evenly throughout the world, with a handful of countries that leverage vast mineral reserves becoming key strategic players in this new landscape.

The world’s leading nations in lithium, cobalt, and RREs hold significant control over more than three-quarters of global production. In 2019, the Democratic Republic of Congo and China contributed approximately 70% and 60% to the global production of cobalt and REEs respectively. The concentration level becomes even more pronounced when considering processing operations, where China dominates across various fronts. China’s refining share reaches approximately 35% for nickel, 50-70% for lithium and cobalt, and nearly 90% for REEs. Chinese enterprises have also made significant investments in foreign assets located in Australia, Chile, and Indonesia. In the cobalt-rich DRC, home to half of the world’s reserves of the mineral, it was estimated that 15 out of 19 cobalt mines were owned and financed by China, which is also in control of the refining process. The high level of concentration, coupled with intricate supply chains, amplifies the risks stemming from potential disruptions, trade restrictions, or other developments occurring in major producing countries.

United States & allies

In an effort to diversify and reduce their reliance on China, countries around the world have begun to introduce new regulations and incentives, aiming to bolster their supply chains in case of geopolitical tensions, natural disasters, or other disruptions. With the threat of climate change and nearing net-zero goals, government interventions provide crucial boosts to its facilitation.

How impactful this can be was demonstrated by the US last year when the Biden administration introduced a step-change for investments towards building a green economy by signing the Inflation Reduction Act (IRA) into law in 2022. The act placed emphasis on strengthening the domestic market and spurring investment in its green energy industry. The focus on regional production becomes particularly evident regarding EV batteries. The revised rules mean vehicles can be eligible for tax credits if a certain percentage of critical minerals used in EVs are extracted or processed in the US or a country with a free trade agreement with the US. While the ambitious and generous bill was welcome in some ways, it also sparked discomfort amongst some of the US’s closest allies as it was considered protectionist and detrimental to their economies.

After igniting much furore, the US started creating avenues for collaborative efforts through beneficial trade agreements and other arrangements, as it began to build out its sphere of influence and create networks that are aimed to enable less dependence on China.

Mineral Security Partnership

Efforts include the grouping of over a dozen allies, such as Germany, France, the UK, and Japan, in the form of the Mineral Security Partnership, an initiative looking to ensure reliable supply chains. In June 2023, India was added to the partnership and comes as New Delhi is gearing up to accelerate its growth strategy which includes the conversion of public and private transport into electric vehicles, which will require a variety of minerals for their batteries.

Transatlantic Force – Critical Minerals Agreement (CMA)

The US is also currently in talks with the EU, negotiating directives for a CMA. In March 2023, President Biden and Commission President von der Leyen began talks on critical minerals used for EVs, ensuring that those extracted and processed in the EU would also count for clean vehicle tax credits and allow EU firms to compete on a level playing field with the US and third country competitors.

A similar agreement was already made in April 2023 with Japan in a bilateral partnership, granting Japanese firms access to the IRA’s lucrative credits. This is also expected to potentially work as a blueprint for the UK to be included in its provisions as the two countries have recently signed the Atlantic Declaration, exploring negotiations around critical minerals.

A shift away from China may not be the way forward

However, despite some of the harsher rhetoric the West has grown accustomed to over the last few years towards China, there are also voices that urge a more rational and sober approach that recognises the gravity of the challenges ahead, thus requiring collaborative efforts from around the world.

Kamran Ahmad, partner at law firm White & Case LLP, specialising in the financing and development of natural resources, energy and infrastructure projects, comments that “China is many years ahead of Europe in terms of battery technology and associated supply chains, including the processing of battery minerals, that serve energy technologies that the world will depend on. So to achieve net-zero by 2050, the world needs China to continue its massive expansion of renewable energy and electric vehicles. The ultimate goal is resolving a common threat in the form of climate change. The Biden administration’s IRA is a great example of government-led stimulus to scale up the development of battery technologies for EVs and grid purposes in the West. China’s success in this sector was, of course, in large part due to huge state intervention and support.”

Looking ahead

As robust supply chains around renewable energy technologies grow in importance for domestic economic stability and national security, it will be critical for the US to continue to foster these relationships with like-minded allies. Despite the investment and overall momentum, the US is currently injecting in the industry, restructuring these complex supply chains involves a whole range of requirements like exploring and developing new mines, and developing expertise and capacity around processing, refining, and manufacturing.

Kamran adds, “If you look at critical mineral projects like Tungsten West or lithium brine projects such as Cornish Lithium in the UK or Vulcan in Germany, for example, there are certainly some very interesting projects happening, but developing them takes many years, as well as significant capital. But these projects ultimately require gigafactory customers, and the UK alone is estimated to require five or more gigafactories to sustain a domestic car manufacturing industry, meaning there needs to be a huge focus on this sector, particularly considering local sourcing and content requirements.”

It is important not to recalibrate entire ecosystems fruitlessly if cooperation remains a viable alternative. This is especially true with regard to China, a country that not only supplies the world with these technologies but is also a huge market itself, with huge growth projections for the coming decades, offering many opportunities to investors. In an intricately spun global economy, the decoupling of the two biggest economies, and polluters, is likely to result in less effective and more expensive systems that are expected to take decades.