Critical Minerals: supply, demand and delivery, James Horton

INTRODUCTION

By 2040, global demand for critical minerals for use in the deployment of clean energy technology is estimated to be four times higher than today.[1] Critical minerals are defined as “minerals of both high economic vulnerability and high risk of global supply disruption” and are characterised by their non-substitutability[2], and we have commented previously on the role of critical minerals in the energy transition.

To address concerns over critical minerals resources, Western governments have prioritised investing in production and domestic and international value chains. In this article, we consider the “supply/demand balancing act” alongside the importance of striking global partnerships to achieve these aims and secure critical mineral supply for the long-term, whilst also considering the role the construction industry has to play in the UK.

INDUSTRY IMPLICATIONS

The Government has stated its intention to establish the UK as an electric vehicle manufacturing hub as set out in its Critical Mineral Strategy published in 2022 and Critical Minerals Refresh update in March this year. In implementing these plans, the UK welcomes collaboration with other nations and will seek to address financial obstacles so that it can protect its critical minerals supply chain and remain competitive.

The UK automobile market, which relies heavily on the supply of batteries and rare earth elements, has called on the Government to extend some tariff-related Brexit deadlines in order to support sector growth.[3] From 2024, electric cars with less than 45% of parts originating from UK or EU sources will be subject to exportation tariffs, increasing to 65% from 2027.[4] Car-manufacturing heavy-weight Stellantis (owner of Vauxhall) previously voiced concerns that the UK will miss a “once-in-a-generation tidal wave of investment” into its car industry if it fails to negotiate an extension to this tariff arrangement, sentiment that other car manufacturers have echoed[5].

To maintain its automotive capabilities, the Government may consider investing in delivering local mass battery production and cementing its complex car-making supply chains. The UK has plans to build several domestic battery gigafactories, whilst the EU has a proposed pipeline of 30 sites.[6] The approval of Jaguar Land Rover’s multi-billion pound electric car battery factory in Somerset is welcome news for the industry. The plant will create thousands of jobs and demonstrate the UK’s commitment to the car manufacturing industry and the critical minerals space.[7]

Reliance on critical minerals such as lithium in net zero related projects is also giving rise to some novel (and sometimes risk-bearing) contracting arrangements between developers and supply chain. Taking battery energy storage system (“BESS”) projects as an example, it is increasingly common to see significant advance payments being made by developers to secure lithium pricing whilst main delivery contracts are still to be agreed. This gives rise to payment risk for developers, which clients are trying to balance against commercial upside in respect of more favourable pricing and delivery programmes.

GLOBAL DEVELOPMENTS

A key aim of the UK Critical Mineral Strategy is to avoid overreliance on a singular critical mineral source, with China currently dominating supplies due to its expansive holdings in Africa and Latin America.[8] The UK has entered into discussions with other nations (Saudi Arabia, Canada, India and Australia) to bolster critical mineral supply chains and UK counterparts in the EU and US are investing heavily in the EV production race.

The EU

The EU released its Critical Raw Materials Act[9] on 16 March 2023, which enacted regulations obliging Member States to establish critical mineral value chains. The CRMA also identifies the need to invest €92billion of state funding to enhance the EU’s net-zero technologies.

[10] This “game changer” position is enforceable and legislative in scope; it may be worth implementing similar measures in the UK to establish its legal position as this area evolves.[11] The CRMA implements a 24-month limit for granting mining permission, after which the project is automatically considered approved if no decision has been reached.

The US

The 2022 US Inflation Reduction Act (“IRA”) aims to protect domestic energy security, prioritise climate change action and promote the production of critical minerals through tax incentives and credits totalling an estimated $369billion.[12] These US tax reliefs only apply to domestically produced content, which should therefore encourage investors to fund electrification projects based in the US in order to benefit from the incentives.

In response to the IRA, the European Commission submitted its Green Deal Industrial Plan in February 2023, which aims to establish Europe’s position at the centre of global green energy manufacturing.[13] The EU has also held discussions with the US about cooperation on trade in critical minerals in March.[14] This dialogue is crucial in developing and protecting supply chains, as well as a clear desire to invest. Individual nations must cooperate with global partners in order to develop “the critical minerals value chains, strengthen supply, enhance ESG standards and build collective resilience”.[15] This reality has come into sharper focus as global supply chains face disruption as the war in Ukraine continues.

MANAGING EVERYTHING EVERYWHERE ALL AT ONCE

Critical minerals projects now compete for limited resources of the type that make infrastructure projects a reality – capital, government incentives and funding[16], leading engineers, designers & construction contractors and technology providers, along with financial, planning, legal and project delivery expertise. Any of the other sectors and technologies involved in delivering on net zero goals are seeking the same inputs at the same time – there is a sense of ‘everything, everywhere all at once’ as economies collectively work towards decarbonisation.

Competition for these enabling resources continues to ramp up. Attracting new UK entrants to the sector will help respond to demand, but it will take some time; there is a lag effect in critical mineral supply chains in particular that means that midstream and upstream pipelines must be enhanced to address supply shortages.

The UK has made meaningful statements in respect of critical minerals by way of its 2022 Strategy, the Strategy Refresh issued in March this year and collaborative conversations with other individual countries. As a next step, the Government could seek to implement a legal critical minerals framework (like the EU) and set aside further funding to provide clear timeframes to the market, incentivise growth in the sector and encourage investment in the UK.[17]

From a project-delivery perspective, given the increasing competition for construction resource, we should expect to see new procurement models and greater risk sharing between developers and supply chain. Many of the principles of the Construction Playbook and the private sector equivalent – Trust and Productivity by the Construction Productivity Taskforce - will provide useful guidance for those involved in delivering infrastructure for critical minerals, particularly midstream projects in the UK (such as refineries, processing and recycling facilities).

We will be publishing a follow-up articles in due course, which highlights the importance of circularity within the UK’s critical mineral supply chain and consumption.

This article was co-authored by James Horton and Clare Livingston. Additional research by Theo Wapshare and Ross Howells.

[1] Resilience for the Future: the UK’s Critical Mineral Strategy (updated 13 March 2023)

[2] Resilience for the Future: the UK’s Critical Mineral Strategy (updated 13 March 2023)

[3] FT, The UK and European electric vehicle trade (21 May 2023)

[4] BBC, Vauxhall-maker warns Brexit threatens electric cars in UK (17 May 2023)

[5] BBC, Vauxhall-maker warns Brexit threatens electric cars in UK (17 May 2023)

[6] FT, The UK and European electric vehicle trade (21 May 2023)

[7] Jaguar Land Rover-owner to spend £4bn on UK battery factory - BBC News

[8] BSR, A Scramble for Battery Minerals

[9] Politico.eu, The critical raw materials you need to know (9 March 2023)

[10] Critical Minerals Association, The UK’s Critical Minerals Refresh 2023 – CMA’s Evaluation (11 April 2023)

[11] Critical Minerals Association, The UK’s Critical Minerals Refresh 2023 – CMA’s Evaluation (11 April 2023)