In recent years, a number of reports on critical and strategic mineral resources have been commissioned by governments and produced by various research organizations and consulting firms. These reports have primarily come in response to China’s growing restrictions on the export of rare earth elements (REEs) and an increased global awareness of the importance of REEs and many other strategic metals integral to national security and economic growth. The European Community commissioned paper Critical Raw Materials for the EU, and consequent report, Material Risk: Access to Technology Minerals, produced by Ernst & Young in September 2010, exemplify the prevailing concern about dependence on foreign supplies of strategic raw materials.
The initial report by the EC, also published in 2010, identified 14 raw materials as critical to European industry, whereas, Material Risk explores “the supply risks facing producers and consumers of these technology minerals, and assess(es) the European mining and metals sectors ability to respond to the supply chain challenge.” While recognizing that the supply of ‘technology metals’ is under pressure, there is no stated recognition that much of this perceived pressure is due to the world’s increasing reliance on Chinese primary production of strategic minerals, including REEs, antimony, bismuth, indium, gallium, germanium and silicon. Nevertheless, the question that remains is: What role, if any, do governments have in supporting domestic industries reliant on critical raw materials or strategic metals?
The Material Risk report, like many government commissioned analyses of strategic markets, begins to wade into murky waters in its effort to identify the actors that governments could put their support behind in order to ensure a reliable supply chain for domestic industries. By defining EU critical mineral producers as those companies “listed or headquartered” in the EU, the report overlooks the disconnect that exists between EU technology companies requiring these materials and EU-listed/headquartered producers. In a global economy, such producers have no responsibility to prioritize selling their products to EU-based industries, nor should it be assumed that EU technology companies have any preference for the production of, say gallium, by a EU headquartered company as opposed to a Chinese headquartered company, for example. For the most part, producers sell to the highest bidder, regardless of borders, and end-users purchase where they can get the cheapest material to meet their requirements. Government support for ‘EU-listed/headquartered’ producers will not change this. Government subsidies, tax-breaks, national stockpiles or state-owned enterprises to explore and survey, all of which are suggested in the report, would actually be of little benefit to the stakeholders (i.e. EU taxpayers). Imagine providing tax breaks or subsidies for the development of a rhodium mine in South Africa (EU headquartered company), which then sells most of its production to the growing car market in Asia. The only consequence would be that EU taxpayers would be subsidizing jobs in South Africa and rhodium prices for Asian car-part manufacturers. Even if production were located within the EU, the benefits of such a subsidy would be limited to a few resource extraction companies.
The irony in such pursuing such policies is that recent changes in Chinese export policies have shown how unsustainable such subsidies can be. Although perceived in the West (and Japan) as resource nationalism, China’s export restrictions on REEs, molybdenum, tungsten and a number of other minor metals have actually been efforts to redress imbalances created by long-standing extractive resource subsidies (particularly low cost energy and neglectful environmental policies) that have driven down the prices of exports and immeasurable negative environmental impacts. Just as consumers in the 1970s adjusted to their energy consumption to deal with the oil supply shocks, so technology industries will find new sources, substitute and develop new methods of production to deal with raw material supply disruptions.
To counter perceived increases in the nationalistic trend of Chinese resource policies and support greater supply chain security for minor and strategic metal industries by responding, in kind, with equally nationalistic policies will only prove more costly than effective. In contrast to much of the recent dialogue surrounding critical and strategic metal supplies, which has suggested that greater government involvement in supporting – or even nationalizing – primary producers will solve supply chain concerns, I believe that the market is much more capable than any government policies at adjusting to recent market changes without instituting subsidies or corporate tax breaks, which would only placing a greater burden on governments coffers and taxpayers. Governments, instead, should examine the role that they can play in supporting research in areas such as substitutability and in the development of more effective collection systems for metal recycling.
- Terence Bell
Senior Trader, SMI Ltd.
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