Brave new world - strategic metals in a green economy

Materials World magazine
1 Sep 2012

UK Government efforts to create a green economy are putting strain on the supply of strategic metals to the domestic market. David Russell of Ernst and Young describes mineral geopolitics and risks to strategic metal supply.

Thursday 21 June 2012 saw a shift in the global effort to address the world’s environmental challenges. The Rio+20 Earth Summit might not have been as memorable as its predecessor 20 years ago when world leaders made groundbreaking pledges to address the issues surrounding climate change, however, a new approach was suggested to tackle the problems that continue to escalate two decades on. The new buzzword is ‘green economics’ – the strategy of using market forces put the world economy on a greener path. Efforts by the UK Government to create such a renewable, low-carbon and green economy require that those commodities crucial to renewable energy technology are economically viable. However, apart from coal, oil and some industrial minerals (most prominently clays and gravels), the UK cannot supply the domestic industrial market with critical strategic metals – including major metals, and those minor metals and speciality alloys that play a key role in the manufacture of high-tech goods.

And so the UK has always relied upon the global market for supply, with reasonable reliability and economic cost. This market has advantages to both supply and demand, ensuring the flow from mine to consumer. The market also imposes its own authority, mainly referring to price. Although the market dictates the price of a commodity, it does not necessarily control the cost. Producer prices (ie cost plus margin) no longer exist as they did a few decades ago. In the global market there will always be mineral product suppliers whose costs are lower than others – usually a reflection of the grade of the deposit, ease of mining, processing or location. For those metals traded on the London Metal Exchange (LME) there are many sources of supply, as well as a market large enough to allow miners from first to fourth quartile producer costs to remain in business. Even in periods of downturn, companies keep their mines in production for as long as possible – placing a mine on care and maintenance and then trying to restart it is normally the more costly option.

Supply statistics

Many metals and mineral commodities are not traded on the LME market. These are usually sold direct to the consumer, such as iron ore or low-cost industrial minerals. Then there are the so-called strategic metals, which perform advanced functions in applications, from power generation to mobile phones and jet engines. Many of these are also used in the defence industry and are therefore of particular interest to governments.

Others, especially the rare earth elements (REEs), have applications in the rising renewable energy industry. The markets for these metals, when measured by weight, are not large. Total rare earth annual mine production is around 130,000t, tantalum 790t and niobium 63,000t. Platinum production totals 192t, and palladium 207t. When examining known reserves the quantities are much larger, with no apparent shortage in Earth’s crust.

This begs the question of why, if there is no geological shortage, did the EU in 2010 compile its list of critical minerals? The answer lies not only in where deposits of these elements are exploited, but also in the politics of consuming nations. Overriding these statistics are population growth and urbanisation, both of which have resulted in a rise in the consumption of metals – an increase that over the last decade has accelerated at an unprecedented rate.

China demands

The UN estimates that by 2050 world population will reach nine billion, of which 6.2 billion will reside in cities. China has undergone a massive shift in population to the urbanising areas of the south and east coastal fringes, and copper consumption here has increased as a result. From 1995–2011, the global compound annual growth rate (CAGR) of copper was 3.2% – for China, this figure reached 13%.

The increasing metal consumption seen in China will continue in those developing countries with the largest urbanising populations, as these emulate the lifestyles (and consumption) enjoyed in the industrialised nations. Take, for example, the materials in an automobile (see table right). With annual global production of around 70 million per year, it requires only a simple calculation to judge the growing demand for these metals. China is now the world’s largest automobile producer, with most units sold in the domestic market.

This move towards domestic production to feed a growing population with aspirations to western consumer lifestyles will continue to drive demand. To that end, China in particular has been active in investing in overseas projects to ensure supply, while restricting domestic production of key minerals, and today it is negotiating deals around the world for many metals. This in turn has raised the value of minerals in the ground and heightened the attention of those countries’ host governments, who are looking for a larger slice of the mineral wealth through taxation or share of production. The map on pages 35–35 shows those countries that have recently raised or signalled an increase in mining taxes.

Resource nationalism is the term used to describe actions by governments seeking to maximise benefit from their mineral endowment. As consuming nations seek to secure strategic metals, holders of strategic mineral resources can charge higher taxes and royalties.

Such is the case within the EU, where past production has been eroded through years of exploitation of resources and, over time, through overseas competition responding to the market with higher grade deposits, and cheaper energy and labour. By allowing the market to dictate, a number of countries have become pre-eminent in the production of certain commodities.

Recently hitting the headlines have been the REEs, which are used in a number of green energy applications, such as permanent magnets in wind turbines and solar panels. At present, some 97% of REEs come from China, whose Bayan Obo deposit has large resources at high grades. But this has not always been the case. While REEs are actually not that rare, environmental legislation and a tendency to prohibit new mines have caused the closure of other projects in the west. Of particular note is Molycorp Inc Mountain Pass deposit in California, which was mothballed in the 1980s. The company is now recommencing production, and has recently acquired advanced processing companies in Canada and Estonia. There is intense exploration activity for rare earths as well as a number of near-production projects, such as the Lynas Corp Mount Weld deposit in Western Australia with a processing plant in Malaysia.

UK challenges

So where does this leave the UK? Having relied first on Empire and secondly on markets to supply our mineral needs, domestic metal production is at minimal levels. Some recent exceptions are Wolf Mining, which is currently developing its Hemerdon tungsten deposit in Devon (Materials World May 2012), and small-scale gold operations in Northern Ireland and Scotland. There is also a large potash project under development in Yorkshire.

One of the reasons for this dearth of UK projects is the labyrinth of planning rules at multiple levels, which can take so long to be met that the opportunity may be missed. Another, more immediate, problem is that of raising equity capital for exploration (at present, virtually impossible) and development (very difficult).

After the global financial crisis between the third quarter of 2008 and the last quarter of 2009, no new mining issues were reported on the London Stock Exchange AIM board, as was the case in the last quarter of 2011. The IPO market has contracted further in 2012, reflecting ongoing difficulty in a weak equity market – a trend seen globally across all sectors.

Other challenges for junior resource companies venturing into riskier regimes include new regulation around the UK Bribery Act (the Frank Dodd regulation covering payments to foreign governments) and the US Foreign Corrupt Practices Act. While no one is decrying their objectives, most of the world is now bound by such legislation – especially those seeking resources in high risk countries. The only exceptions to the rule are certain foreign governments currently acquiring strategic resource projects throughout the world.

If the UK Government is to fulfil its objectives and create a much talked-about green economy, these challenges must be addressed – and this time there might not be another 20 years to come up with an alternative.