Critical metals supply summit

THE NEW POLITICAL ECONOMY OF RARE METALS

Critical Metals Investment Symposium

Vancouver, January 21, 2011.

JAAKKO KOOROSHY

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INTRODUCTION

The Hague Centre of Strategic Studies (HCSS)

•Independent think-tank providing strategic orientation and

navigation services

•Clients range from national governments, transnational

organizations to private companies & NGOs

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organizations to private companies & NGOs

•Young, rapidly growing organizations with excellent European

and trans-Atlantic ties

•“The political economy of resource markets among key topics

•Focus on rare metals with much in-house expertise, an excellent

track-record and strong networks

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INTRODUCTION

The Hague Centre of Strategic Studies (HCSS)

Why focus on the political economy of natural resources?

•One of the central ‘new’ strategic issues in a multipolar world

•Multiple linkages to a number of other strategic themes of our

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•Multiple linkages to a number of other strategic themes of our

time (e.g. climate change, the Return of Asia, the energie

transition)

•A central policy challenge of our times

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INTRODUCTION

The Hague Centre of Strategic Studies (HCSS)

•Scenario development for the national risk assessment of the

Netherlands and advising of other ministries

•POlicy on NAtural RESources (POLINARES) large 7th Framework

Programme project with 12 European partners

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Programme project with 12 European partners

•Watch Out: “Conflict, Coltan, & Congo”

•Partnering with Oakdene Hollins for assessing rare metal supply-

chain bottlenecks in priority low carbon technologies for the JRC

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SCARCITY: AGE OLD FEAR & FASCINATION

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I looked, and there before me was a black horse! Its rider was holding a pair of scales in his

hand. Then I heard what sounded like a voice among the four living creatures, saying, "A

quart of wheat for a dinares, and three quarts of barley for a dinares”

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WHY COMMODITIES MATTER AGAIN-

• “new economy” (1995-2001) >> “revenge of the old economy” (2004)

>>“revenge of the old political economy” (2008) >> “new normal” (2009-?)

• Commodities key part of the story, with

• high price levels and strong volatility

• tight markets and supply side constraints

• states and their proxies (SWFs, SOEs, regulatory bodies) as key actors

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• states and their proxies (SWFs, SOEs, regulatory bodies) as key actors

in markets

• added factor Climate Change debate

� Intense politicization and securitization of commodity markets

�Emerging nexus of environmental, economic & security policy

Demand Side

Fast Demand Growth

Price Increases

HISTORICAL EPISODES OF HIGH COMMODITY PRICES

Supply Side

Slower Supply Growth

Increases

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SUPERCYCLES???

+For rare metals:

•Technology-driven demand spikes

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Source: Cuddington & Jerrett (2008), Super Cycles in RealMetals Prices, IMF Staff Papers, Vol 55, no. 4; p. 558.

+ demand spikes

•High concentration of supply

Fast Demand Growth

Securitization

Price Increases

Market Distortions& Supply

A SIMPLE MODEL: THE POLITICAL ECONOMY OF RESOURCE PRICE HIKES

Slower Supply Growth

Politicization

Increases & Supply Disruptions

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GOVERNMENT INTERVENTION IN RARE METAL MARKETS

•Rare metals are especially prominent in the resource debate due to:

•Western import-dependence & crucial role of China

• indispensability for high- & green-tech applications

• inelasticity & concentration of supply

• fast-growing & highly volatile demand

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fast-growing & highly volatile demand

� This creates supply security concerns and makes (some) metals

into “strategic” resources!

� The strategic value & political economy of each metal is

unique, evolving rapidly, and …

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GOVERNMENT INTERVENTION IN RARE METAL MARKETS

•In response to supply security concerns, importing countries

• designate particular rare metals as “critical”

• actively monitor supply and demand

• create stockpiles & develop domestic supply

• diversify & secure supply

• regulate trade and consumption

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•Authorities of exporting countries seek to

• increase profits through taxation, licensing, nationalization

• control valuable downstream industries through preferential supply

or export restrictions

• use rare metals as strategic bargaining chips.

� … this can matter greatly for the success of business ventures

and investments in the market for a given rare metal!

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THE CHALLENGE OF POLICY RESPONSE

•In the context of historical price hikes, there is little new about current

policy responses

•Case studies demonstrate that perceptions and responses differ

considerably and are shaped strongly through national policy ‘prisms’

•Different policy approaches impact different aspects of the price/politics

nexus

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nexus

•National policy responses can sometimes be counterproductive...

Fast Demand Growth

Securitization

Price Increases

Market Distortions& Supply

A SIMPLE MODEL: THE POLITICAL ECONOMY OF PRICE HIKES

Slower Supply Growth

Politicization

Increases & Supply Disruptions

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•Raw Materials Initiative (RMI) led by DG Enterprise & Industry

resulted in the 2008 Communication with focus on non-energy

mineral resources:

•Ensure equal access for European industry globally

•Promote supply expansion from European sources

•Boost resource efficiency and recycling

EUROPEAN POLICY RESPONSE TO RARE METALS DEBATE

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•Follow-up EU criticality study released June 2010:

•Examines 41 minerals and metals with 14 labeled as “critical”

•Recommends to tailor policy responses for each critical material

•Extensive consultation process has just been wrapped up

•Watch out! A new Commission Communication on latest

developments and the progress of the RMI at the end of this year

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•Raw Materials Initiative (RMI) led by DG Enterprise & Industry

resulted in the 2008 Communication with focus on non-energy

mineral resources:

•Ensure equal access for European industry globally

•Promote supply expansion from European sources

•Boost resource efficiency and recycling

TWO EXAMPLES : EUROPEAN POLICY RESPONSE TO RARE METALS DEBATE

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•Follow-up EU criticality study released June 2010:

•Examines 41 minerals and metals with 14 labeled as “critical”

•Recommends to tailor policy responses for each critical material

•Extensive consultation process has just been wrapped up

•Watch out! A new Commission Communication on latest

developments and the progress of the RMI coming any moment

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EUROPEAN POLICY RESPONSE TO RARE METALS DEBATE

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Source: European Commission, DG Enterprise and Industry “Critical Raw Materials for the EU” Brussels, 2010.

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• EU is stepping ahead with member states’ responses still

fragmented:

•Germany is in the lead

•Strong French response has been somewhat delayed

•UK is still looking to develop a coherent policy

•Compared to US and Japanese efforts to ensure supply security:

CONCLUSION: WHERE DOES EUROPE STAND ON RARE METALS?

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•Compared to US and Japanese efforts to ensure supply security:

•No stockpiling

•No establishment of domestic / Western supply chains for

rare metals

•Little government investments as of yet

�This might change very fast!

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EU MEMBER STATE RESPONSES: GERMANY

�A driving force behind the EU

Raw Materials Initiative (RMI)

�Following ongoing

“Rohstoffdialog”, the German

government is currently finalizing

its new “Rohstoffstrategie”. Key

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•Close cooperation between various ministries, BGR & corporations, with

a new “Rohstoffagentur” as central actor

•Strengthening of bilateral cooperation with resource-rich developing

countries

•International engagement to lower market distortions and promote

global investments through “ungebundene Finanzkrediete” (UFK)

its new “Rohstoffstrategie”. Key

elements are:

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•So far the US policy response has been focused on REEs and the

national security aspects of rare metals supply.

•Growing list of legislation:

�H.R. 4866 RESTART Act

�S.3521 RESTART Act

�H.R. 6160 Rare Earths and Critical Materials Revitalization Act of 2010

P.L. 111-84, the Fiscal Year 2010 National Defense Authorization Act

TWO EXAMPLES : US POLICY RESPONSE TO RARE METALS DEBATE

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�P.L. 111-84, the Fiscal Year 2010 National Defense Authorization Act

�H.R. 5136 Fiscal Year 2011 National Defense Authorization Act

•Policy response has mainly consisted of stockpiling initiatives and calls for

government support to domestic mining activities, with DoD as principal

actor.

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•Independently hereof the DoE has followed its

own trajectory and recently published major

criticality report

•The report provides the outlines of a new policy

strategy. Considered options include:

•Selective financial assistance most likely as loan

guarantees

TWO EXAMPLES : US POLICY RESPONSE TO RARE METALS DEBATE

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guarantees

•simplified permitting for mines and

manufacturers

•increased recycling

•international diplomacy

•Also an extensive new R&D plan

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TWO EXAMPLES : US POLICY RESPONSE TO RARE METALS DEBATE

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Source: DoE “Critical Materials Strategy” Washington, 2010.

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SHORT RECAP

•Like other commodity markets, the markets for metals have

become subject to intense politicization and securitization

•In times of the “new normal”, the unique political economy of

each metal market creates specific threats and opportunities for

miners, manufacturers & investors

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•Grasping, anticipating and navigating this political economy is

rapidly becoming a key determinant to business success in the

world of mining

•HCSS is a reliable partner in strategic orientation & navigation

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SHORT RECAP

•Questions???

•Please get in touch!

� [email protected]

�www.hcss.nl

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