FTI Consulting Public Affairs Snapshot – Mission Critical: The race to secure the critical minerals supply chain

One increasingly important aspect of the global supply chain is the availability of the critical minerals needed for the global drive to net zero emissions. From electric vehicles to wind turbines, minerals such as cobalt, lithium and rare earth metals are essential to the UK’s net zero ambitions and its industrial strategy more broadly. Production of these minerals, however, is limited to a small number of countries, while China, through years of planning, controls much of the global supply chain. This is an area of strategic weakness for the UK, and the West more broadly. The UK Government has identified the problem and committed to publishing a strategy in 2022, as the US and EU have already done, but whether or not it can avoid future disruption is an open question.

Key components of the future economy

The West is set to see dramatic changes to some of their most important industrial sectors. Electrification and zero emission technologies such as hydrogen will drive efforts to mitigate their impact on climate change. Many of these industries will be dependent on technology-critical minerals  and rare earth metals for their ultimate viability; potential supply constraints in these critical materials have the potential to be calamitous for vast swathes of the economy.

The Critical Minerals Association (CMA) has split the definition of critical minerals into three subsections. Critical minerals are important for the UK’s industrial strategy and consist of minerals such as lithium, cobalt and rare earths. Technology metals are bulk metals such as copper which are also important to the UK’s industrial objectives but are not as susceptible to supply chain vulnerability. Finally, strategic minerals are of potential defence importance. Given the policy attention on decarbonisation, the first of these categories is of pressing importance.

Lithium and cobalt will be vital for the UK’s developing electric vehicle and battery industry. Rare earth metals are key components in the permanent magnets used as generators for wind turbines. Platinum group metals will be crucial to future electrolytic hydrogen production in the UK. The future economy, and the UK’s purported “green industrial revolution”, is contingent on a steady supply of critical minerals.

Critical Condition

As these technologies have developed, and the drive to net zero has gathered pace, demand for critical minerals has surged. In the UK, as the drive to net zero takes centre stage, the inexorable rise in demand for these materials is set to continue.

Taking lithium as an example, as battery electric vehicles (BEVs) have begun to shift into the mainstream, prices for lithium have been driven up. Metals advisory firm House Mountain Partners forecast in July that lithium demand could triple between now and 2025, before doubling again by 2030. This would require four new lithium mines to open every year to satisfy demand. While it is a common view that BEVs will reach price parity with traditional fossil fuel models by the middle of the decade, analysis from Goldman Sachs in March concluded that the price of EV batteries would increase by 18% by 2025. As the battery equates to between 20 and 40% of the value of the car, they predicted that EV prices would not reach price parity until 2030. This could do potentially fatal damage to the UK’s target of phasing out internal combustion engine cars and, more broadly, to reduce emissions by 68% compared to 1990 levels by 2030.

This threat to the UK’s green transition is replicated across much of the globe. However, it is geopolitical concerns regarding China’s pre-eminence in the market that have sharpened the focus of Western governments. China controls the vast majority of the global critical minerals supply chain and has invested heavily in its processing capability to convert these materials into usable products. This approach has given it significant control over the entire supply chain.

Reliance on China has the potential to turn sour. Between 2005 and 2012, China introduced export quotas and taxes for rare earth metals, resulting in large price fluctuations and a 2012 World Trade Organisation dispute, with the US, EU and Japan arguing that China’s restrictions violated the WTO’s regulations. While the WTO ruled in favour of the US, this may have served solely as the opening salvo in a protracted trade dispute. Countries that benefit from the asymmetric critical minerals market, including China, may seek to leverage their dominance to scupper foreign industries.

Self-sufficiency or Global Britain?

This begs the question of what countries can do to ensure they can access sufficient supply of these materials, with national stockpiling mooted by the likes of Goldman Sachs. Relatively resource poor countries such as the UK, and the businesses that operate there, must be cognisant of the risks to key sectors.

While the UK is not home to a wealth of natural resources, potentially globally significant lithium deposits have been discovered in Cornwall. Companies such as British Lithium and Cornish Lithium are assessing the potential for mining, although there are other parts of the equation to consider. The EU is in the process of trying to shore up its supply of critical minerals but plans for one of Europe’s largest lithium mines outside of the medieval town of Cáceres, Spain, has met fierce local opposition. A potent combination of NIMBYs and environmentalists would likely threaten the development of mining operations in Britain.

Beyond Cornwall, “Lithium for the UK” is a project aiming to help meet the huge increase in demand for the battery metal anticipated from the transition to electric vehicles. The project is borne out of a recognition that the UK is currently too dependent on China, seeking to identify “the requisite processing technologies and possible sources of raw materials needed to develop a sustainable, domestic lithium supply chain”.

These processing technologies are likely to be of prime importance, especially given that there are a range of critical minerals that will be vital to the UK economy, beyond just lithium. While China has captured much of the market, net zero targets and the broader ESG drive mean that there is space in the market for competition from companies with higher environmental standards. Significant carbon gains are there to be made by onshoring parts of the supply chain, providing an opportunity for UK plc. Furthermore, as China begins to lose some of its cost advantage, and countries and companies look to diversify their supply chains, a significant UK critical minerals midstream sector could become reality.

Developing a midstream market, however, would still be reliant on international trade in the raw materials themselves. Here there is an opportunity for the mutually beneficial deepening of ties with existing partners and nurturing new relationships. The Five Eyes security partnership has been raised by UK parliamentarians as a potential avenue for cooperation. While countries like Canada and Australia have significant upstream capabilities, the UK could develop further its downstream capacity to create a symbiotic relationship. Similarly, new opportunities like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) open the possibility of joining trading blocs with new partners, some of whom have access to mineral resources.

There is one further way in which the UK could secure its supply of critical minerals. An increased emphasis on the circular economy could yield a significant secondary supply stream for the UK. Recycling or re-using materials at end-of-life or from production scrap could provide the UK with a domestic supply of critical minerals. While there are significant technological, economic and regulatory barriers, there is already ongoing work to address these. Such schemes are currently nascent, but they could present an attractive, sustainable opportunity for the UK while also raising the prospect of greater security.

Next Steps

The forthcoming UK Critical Minerals Strategy will be informed by a new Expert Committee on Critical Minerals and a Critical Minerals Intelligence Centre. These developments follow exploratory work conducted across Whitehall in recent months, with a view to ascertaining which key materials will be needed and building national resilience. Government is at least aware of the importance of this issue.

The question now is whether it will grasp this challenge sufficiently to ensure that the green industrial revolution that it envisions for the UK comes to fruition. The success or otherwise of large swathes of the future UK economy rest on the underpinning critical minerals supply chain. However, if business and government can get this right, there is a significant opportunity for the UK to develop a new green material processing industry, enabling other aspects of the green revolution and boosting domestic prosperity.