Strengthening partnerships for critical minerals supply chains

Critical minerals are those non-fuel minerals that are essential for the economic and national security of a country but are vulnerable to supply chain disruption. These include lithium, cobalt, graphite, copper, rare earth elements, and platinum group metals, amongst others. These minerals are required for producing stealth aircraft, night vision goggles, missiles and radars; electronic and quantum computing devices; wind turbines, solar PV panels, batteries, electric vehicles; and medical diagnostics and imaging equipment. Therefore, the availability of these minerals plays an important role in national security, economic prosperity and clean energy transition. 

High demand 

The supply-demand gap of critical minerals is 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. 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. Consequently, their annual production value will also increase by 5-6 times, growing to over US$250 billion. 

Increasing geopolitical competition 

This increasing demand has triggered geopolitical competition between countries to gain access to these resources. However, the mining, processing and refining of critical minerals is highly concentrated in a few countries, notably China which contributed to a high global share of mining of rare earth minerals (60 percent) and its processing (85 percent) in 2019. China also accounted for a high share of the production of cobalt (65 percent), lithium (58 percent), copper (40 percent) and nickel (35 percent). 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 concern for countries.  

National 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, and 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 the 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 the annual consumption of critical raw materials in the EU. This is expected to lead to a significant increase in investments for exploration, development of new mines and infrastructure, and improved technologies for processing and recycling of critical minerals, in the next few decades. 

A national critical mineral strategy would be the next logical step for countries such as India, Russia, China and South Korea which have global geopolitical ambitions. 

Multilateral and bilateral partnerships

Multilateral and bilateral trade partnerships are one of the main pillars of the 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 trade 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 United Kingdom-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 through joint ventures, research collaborations, and information-sharing agreements can help build more resilient and secure supply chains.

The way ahead 

There are several other measures that can be taken to make critical mineral supply chains more robust and secure. These include:

1. 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.
2. 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 the diversification of suppliers.
3. Developing stockpiles. Building strategic stockpiles of critical minerals can help to provide a buffer against supply disruptions and price fluctuations. Accumulation of reserves of critical minerals could be mandated and undertaken by government agencies and supported by industry. These stocks can be drawn upon during periods of shortage. 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. 
4. 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 lead to better financial viability and allow companies to invest in mining projects with a long-term horizon. 
5. 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. New and improved mineral extraction and processing technologies lead to higher profitability for industries. Funding for research and development improves the productivity of mining in the long run and can lead to the development of substitutes.
6. 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.

Conclusion 

Secure critical minerals supply chains are essential to 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 the focus must be on strengthening trade partnerships. 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 easing supply challenges.