Moving from the passenger to the driver's seat on critical minerals

Our SOAS DLD Conversation on the link between critical minerals and economic transformation was fascinating. 

Guest speaker, Amir Lebdioui, hit the nail on the head when he described a situation where too many countries are in the passenger seat – hoping that their mineral endowments will lead to economic transformation, but with the strategy to get there still evolving. There were a number of important insights from all three speakers, Isabelle Ramdoo, Amir Lebdioui and Paul Atherley, which may be of help to countries wanting to take greater control.

The following is a snapshot of some of the most challenging observations.

Value addition may not always be the most strategic move

There is a general, and understandable, sentiment that countries need to add value to their critical minerals in-country, through beneficiating them and/or developing the industries which use them. This is in many ways a deeply felt reaction to colonial extractivism and ongoing resource exploitation, and in particular, as Isabelle noted, a feeling from communities living close to existing mines who have seen little, if any, improvements to their lives. Paul mentioned that many governments, including the Angolan Government reward companies who plan to develop beneficiation. However, beneficiation and value-addition may not always be the most strategic economic decision for a county and there are important factors to consider:

• China is so dominant in the mid-supply chain of many minerals, that it is very hard for other countries to become cost competitive. It is not impossible however, and there is appetite for developing alternative supply chains, but the economics are tough.
• The ability to develop successful cost-competitive mid- and downstream industries depends a lot on quality and quantity of the ores a country has, as well as the availability of other inputs such as chemicals, technologies, low-cost energy and transport infrastructure.  Paul noted that Pensana’s commitment to beneficiation in Angola involves complex chemistry, significant technology transfer and training, and depends on Angola’s good hydropower and the Lobito corridor rail link.
• If a country is not in a dominant market position for a particular ore (as Indonesia was in nickel), then tools to encourage domestic value addition such as export bans are going to have limited or even negative impacts. 
• If a country has limited supply of a mineral then to develop a whole industrial sector around this could lead to future costly import reliance. Here working together with neighbouring countries (as Zambia and the DRC are doing around the battery industry), may offer some solutions, but this is a likely to be complex process to negotiate with varying interests.
• Part of the rationale for moving out of dependence on export of primary commodities is because of their notorious price volatility, however as Amir noted you have to move pretty far up the value chain to be free of this. The markets for many beneficiated minerals are also very volatile. 

Given these factors, in some instances it might be better for governments to focus on using the revenues from critical minerals (for example, through the use of a sovereign wealth fund) to support the development of other, industries, which make more strategic long-term sense (for example they may be more viable, they may generate more net foreign exchange, they may generate more employment, or they may have greater ‘spillover’ effects) or to finance other developmental priorities. The point is to consider all possibilities.

Pre-existing industrial capabilities are more important than natural resource endowments

If you look at the countries that are succeeding in moving into exports of low-carbon technologies these are based on their pre-existing industrial capabilities rather than their natural endowments. Malaysia is succeeding in solar cells on the back of its electronics industry; Mexico is exporting electric vehicles because of its capabilities in petrol vehicles and Brazil’s wind turbines draw heavily on its expertise in making turbines for the aerospace industry. This is not to say that countries with significant endowments but little to no industry cannot make the transition, but to warn that it is a difficult path and there are likely to be others ahead of them.

Critical minerals will not always be critical

Huge amounts of research and development money is being poured into alternatives to minerals such as lithium and things can change very rapidly. Amir told the cautionary tale of Chile’s exports of natural nitrate which collapsed on the discovery of synthetic nitrates. If downstream industries are built purely based on the existence of deposits of one or two key minerals, countries could be left with expensive stranded assets and unmet expectations.

Private investment is by no means guaranteed

Despite the high demand and immediate short fall in supply, private investment is not necessarily flowing to critical mineral projects because of the very high capital costs and long wait for returns. Isabelle noted that it takes on average 17 years from the first drill hole to production for many critical minerals. Investors are also cautious as medium and long-term demand is hard to predict as substitutes are developed, more supply comes on stream, there is more recycling etc... Paul pointed to the critical role the Angolan Government has played in getting Pensana’s operations up and running, through the Angolan Sovereign Wealth Fund, as well as the growing role of regional development banks. It may be that public financial institutions are best placed to fill this financing gap however if a project is deemed too risky by private investors, the case for using public money needs to be a very strong one.

Strategic questions for governments to consider

All this is not to say that beneficiation and value addition are impossible, but rather that policy makers need to be extremely strategic in how they approach using their natural resources to avoid the ‘resource-curse’ and mistakes of the past.

Key steps could include:

• Define criticality for themselves. Both Isabelle and Amir noted that the term ‘critical minerals’ has been largely defined by the user countries in the Global North. Low and middle-income countries need to define what is critical for themselves. It is also interesting that advanced industrialised countries also have some of these minerals, for example Australia, the USA, and Canada, but they may decide that maintaining their environment is more ‘critical’ to them then developing these resources. Each country will be different.
• Invest in understanding the resources that they have, the quality, the quantity and where the future market and risks for related industries lie. Amir suggests setting up ‘technological foresight units’.
• Develop a long-term coherent development strategy and figure out where all minerals (not just those deemed critical) fit in. The temptation to take the short-term cash from exporting unprocessed products may be very strong – and in some cases will be the right decision. The drive to add value in country will also be very strong but comes with a number of risks. Each country needs to figure out how whichever path they choose will contribute to long-term sustainable economic transformation and job creation.
• Develop regional alliances. This can help pool resources to make certain industries more viable and can even shape markets. As the mining industry becomes increasingly shaped by scale economies this becomes even more important for low- and middle-income countries.

Header image credit: Paul-Alain Hunt via Unsplash.