The proverb goes ‘when everyone is digging for gold, it’s good to be in the pick and shovel business.’ If the energy transition of the 21st Century bears any semblance to the 19th Century gold rush that spurred the Industrial Revolution, what then are today’s picks and shovels that investors can capitalise on? The answer… critical minerals, such as lithium used in batteries or graphite used in aerospace applications and nuclear power plants.
Why? Because reaching the goals of the Paris Agreement will require a fourfold increase of current minerals inputs for clean technologies by 2040 and hitting the global Net Zero target by 2050 will require a sixfold increase of mineral inputs by 2040. Or rather, an increase from 7 million tonnes to 27.3 million tonnes for the Paris Agreement and 42.9 million tonnes for Net Zero targets. Perhaps more alarmingly, stated policy measures drastically fall short of future demand and a lack of critical minerals risks the great energy transition that will define this century all together.
The current UK state of play is intensely risky due to global trade concentration and near exclusive reliance on imports. Of the 26 critical minerals measured against global supply risk and UK economic vulnerability, only titanium scores a ‘low criticality’, 6 score ‘elevated criticality’, and the remaining 19 critical minerals score ‘high criticality’. As key ingredients in a clean and green future, the UK is heavily exposed to a market where the top three producer countries (China, South Africa and Brazil) control between 73% and 98% of total global production of at least 18 of these critical minerals – perhaps more exposed compared to the supply chains disrupted by the Covid-19 pandemic.
Government thinking about critical minerals began in 2010 when a trade dispute between China and Japan led to raw earth mineral prices quadrupling. Although China was able to demonstrate its market dominance, it wasn’t until 2021 when UK policymakers turned their thinking into concrete policy ambitions; somewhat late to the game compared to the US which began providing direct investment in production facilities in 2018.
The Integrated Review of Security, Defence, Development and Foreign Policy (currently being revised after failing to anticipate Russia’s invasion of Ukraine) was published in 2021 and quickly followed by the Critical Minerals Strategy in 2022. A Critical Minerals Expert Committee and Intelligence Centre were created in 2022 for advisory and knowledge sharing purposes, as well as a set piece funding announcement for the world’s first refinery hub, a midstream process for refining raw earth materials, powered entirely by offshore wind.
This step change by government in setting out its high-level intentions and policy ambitions is welcomed by investors. One investor told WA that “the government strategy is required because all the capacity is currently in China who are well established… and for the UK and Europe to suddenly compete you have pile in a lot of investment.” Or in the words of another industry expert, the challenge now is “…figuring out if this signpost will actually lead to pots of gold.”
A repeated concern of the Critical Minerals Strategy is an absence of deliverables and detail. It only goes part way in providing the necessary ‘enabling environment’ to attract greater private sector investment. The government already offers a range of funding pots from which the critical mineral sector can draw, such as the Automotive Transformation Fund (up to £850m) or the UK Infrastructure Bank (up to £22bn). However, if the government is truly serious about the UK’s vulnerability in the critical minerals game it will need to significantly step-up funding, its mechanism of distribution, and reform some of structural market barriers, such as the permitting and planning process for domestic extraction. Doing so will unlock private sector activity, capital and finance across the sector from exploration, extraction to refinery both at home and from abroad. It will also crucially, de-risk investment as government policy and funding aligns ever closer with new investment opportunities.
Resolving the critical minerals conundrum will require the same approach adopted for the British success story of ‘going for wind’ in the energy market. Government support since the early 2000s in cultivating, developing, and expanding wind turbines installed offshore has established the UK as the global leader in offshore energy. Central to the government’s approach was a clear partnership with private sector finance, working together in transforming a now maturing market where electricity generated from wind power increased by 715% from 2009 to 2020, generating almost £6bn in turnover in 2019. Government support matched its rhetoric, in turn boosting investor confidence and investment opportunities in offshore wind. As for critical minerals, the sector is, comparatively speaking, at the cultivation stage and whilst government rhetoric provides much needed clarity, funding will need to speak louder than words.
We can expect to hear more from both main parties ahead of the next general election. Investors should ready themselves for a government delivery plan in the coming months which will provide further detail and timeframes, as well as a national-scale assessment of critical minerals collating geoscientific data by March 2023 – crucial for spotting domestic investment opportunities. Beyond the next general election, critical minerals will be a priority for government whichever political party wins. Just as supply chain resilience is a particular concern for the current Conservative government, critical minerals will also be an indispensable ingredient of Labour’s flagship ‘Green New Deal’.