Natural Resources
Comment
21 September 2022
Words and Deeds
Ahead of Novembers G20 meeting in Bali, the Indonesian hosts asked the IEA to produce a report on the challenges of maintaining energy security in the context of clean energy transition on the path to net zero. The report, “Security of Clean Energy Transitions”, and its recommendations was published last week.
The chapter titled “Establishing a Secure and Diverse Supply of Critical Minerals” concludes with four recommendations for governments to follow:
- Send clear, unconditioned signals to markets that clean energy transitions are irreversible policy principles, to ensure that clean technologies based on critical minerals develop according to the best standards and are deployed more quickly.
- Create an environment that is conducive to large-scale investment in new projects to increase the supply of critical minerals along value chains, including by reducing and shortening permitting procedures, offering public assistance and financing, and committing to binding offtake wherever appropriate to support new capacity.
- Apply a new systemic approach, including the stockholding of critical minerals, to ensure security of supply. ESG standards are all the more important as meeting the exponential growth in demand for critical minerals will require a significant increase in mining and mineral processing.
- Ensure that G20 countries participate in the international efforts aimed at developing a well organised, standardised, and stable market for critical minerals globally, including through the IEA Critical Minerals Working Party
All eminently sensible but one can’t help thinking that although the chances of the G20 agreeing on the words are reasonable, the chances of timely execution are pretty small.
Governments aren’t the only culprits here of course, but the gap between arm waving statements for some point in the politically distant future and action in the short and medium is starkly illustrated by the chart (from the same report) below:
Development capex for new mining projects has often been slow to appear not because of market failure per se but due to political uncertainty in the host countries. Strong, public, and perhaps legislated, commitments from governments to the energy transition alongside financial incentives to get there are imperative, as are streamlining red tape and expediting permitting processes. Both would be a huge boost to miners and investor’s confidence in putting high risk capital to work to support multi-decade projects.
But the law of unintended consequences surely applies here. Given how fraught the mining development process can be with a myriad of, by their very nature, unforeseen events, in addition to the changing requirements of technological solutions, the idea of governments picking the winning projects for tax-payer’s to cough up to secure the offtake or indeed purchasing stockpiles of critical metals to secure supply, hints more at future market distortions, hindering innovation and national self- interest than a solution to a global problem.
Government offtakes could crowd out private sector buyers, many of whom are already struggling to secure critical mineral offtake and setting up “strategic reserves” will likely result in further price distortions serving to exacerbate price peaks and troughs already caused by the investment cycle.
It is already beginning to happen but the logical “so what” for consumers of critical minerals could be for downstream users to establish relationships with a variety of upstream producers/developers and consider supporting earlier projects to secure a diverse supply from abroad and domestically.
Charlie Cryer
Head of RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com
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