Natural Resources
7 March 2022
Comment
Strategic Metals (TSX-V:SMD) – Critical, but what are we actually doing about it ?
Strategic Metals (TSX-V:SMD) and minerals are defined as those vital to modern technology and industry, often where substitution is not possible and supply is limited and potentially subject to disruption.
The Covid pandemic has highlighted growing global concerns over supply chain security in a de-globalising world economy. These concerns are being driven home now by the unfolding consequences of Russia’s invasion of Ukraine and the potential for countries to weaponise commodity supply.
As the world accelerates toward a bifurcated economic and financial system – a Western one and a China-centric one – increasing global political risk has prompted much commentary and forthright warnings of the importance of access to “strategic” metals. Amongst others, the US and the EU and have been increasingly vocal on the issue, compiling lists, policies and in some cases money, to encourage public and private capital to invest in new supply and processing capacity.
Rare Earth Elements (REEs) feature highly on the lists given their importance to energy transition technologies as well as other high tech and military applications and they are a useful case in point. Indeed, the recently released USGS 2022 list of critical minerals (accessible here) includes 16 of the 17 REEs.
China overtook the USA as the world’s dominant miner and, more importantly, processor of Rare Earths in the 1990’s and having achieved a 90% global market share, introduced export restrictions in 2009 which eventuated in a 500% price spike in 2011. A Western scramble for alternatives ensued but subsided prettty rapidly as export restrictions were reversed.
China Praseodymium-Neodymium Oxide Market Price Shanghai, January 2008 to present. Source: Bloomberg
Since then, mining companies in Australia, UK and elsewhere have been trying hard to provide diversification and new sources of supply but despite their efforts, progress to embed production and processing of these key metals in Western supply chains has been painfully slow. There are still only two Rare Earth producers of scale outside of China, Australia’s Lynas Rare Earths and MP Materials in the USA. (It is worth noting however, that the material produced from MP Materials’ mine in California is shipped to China for separation, given that there is no suitable processing facility in the USA). Plans for alternative extraction and processing projects have struggled to attract Western capital and, with some exceptions, new plans largely remain on the drawing board.
China has shown no such reticence, and its intention to maintain a strangle hold on these key decarbonisation commodities looks set to continue.
Chinese processing giant Shenghe has been on a shopping spree in recent years, quietly engaging with actual and potential new non-Chinese producers, gathering positions and/or offtake agreements in a portfolio of the most promising projects including Greenland Minerals and MP Materials. Last month Shenge took a 20% stake in ASX listed Peak Rare Earths from private equity group Appian Capital. Peaks’s Tanzanian project, Ngualla, is arguably the best undeveloped Rare Earth deposit globally and the company has plans to put a processing plant in the UK, the first in Europe.
In terms of commodity markets Rare Earths are a pretty niche corner but they are perhaps illustrative of the issue.
In the decade since the 2011 price spike China’s market dominance of the Rare Earth supply chain hasn’t changed and neither has its willingness to deploy the necessary long term capital to ensure it doesn’t. At the same time the economic importance of the metals and concomitant vulnerability of Western economies to supply shocks has only grown.
Commodity price increases are perhaps beginning to reflect heightened geopolitical risk and may stimulate the multi-stakeholder approach that is likely to be required if the West wants to really secure it’s supply chains of some critical metals.
The recent history of Rare Earths doesn’t necessarily bode well, at least not yet. As the old cliché goes, the cure for high prices is high prices, but given the current backdrop they may be around for a bit longer.
Charlie Cryer
Head RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com
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