Access to strategic minerals is a hot topic. All major economic powers are having to deal with security of supply issues in some form or other. In Europe, a working group of the European Commission has recently published a report on the matter. The working group has devised a list of 14 raw materials or groups of raw materials they regard as ‘critical’, and makes a set of policy recommendations. These recommendations are tame, to say the least, and if these comprise the full set of policy actions the EU will implement to ensure enduring access to scarce minerals - those needed for sustained economic well-being- then I fear the European region will gradually fall off the list of developed nations towards third world status.
In their report ‘Critical Raw Materials for the EU’, the Ad-Hoc Working Group observe a global growing demand for raw materials, and the concentration of their production in a limited number of - often unstable or unreliable - countries. Some of these countries apply industrial policies such as trade, taxation and investment instruments in order to maintain or improve continued access to scarce minerals. The use of these instruments blocks the flow of free trade in these resources, and prevents resource-poor regions such as the EU from access to them, hampering further industrial development and thereby impacting current and future economic growth.
It is the aim of the EU, the report continues, to battle this glaring injustice through such far-reaching actions as:
- updating the now defined list of critical raw materials every 5 years
- improving local permitting processes and land access within the EU for exploration purposes
- to consult with distortionary countries in order to ‘exchange views’ and ‘request adherence’ to market forces
- as an act of last resort, to consider WTO initiatives where consultation fails
- a final set of policies regarding stimulating recycling and substitution efforts.
The implementation of this list of actions should suffice in allowing the EU lasting access to raw materials it doesn’t naturally possess, but which are indispensible as inputs to high-end industries for which the EU has a competitive advantage.
Let’s compare this to the activities of other major economic powers. In the US, a number of initiatives at senate and congressional levels have been put up for decision-making regarding the dependency of the clean energy sector on raw materials originating from China. Recommendations have focused on using such instruments as domestic preference, subsidizing R&D, stockpiling, and rebuilding domestic supply chains around the most strategic of natural resources (particularly the rare earths). The military have expressed similar concerns of dependencies on China regarding critical inputs to high performance and high tech weaponry.
Japan, on par with the EU when it comes to (lack of) access to natural resources, has been able to build and expand a vast industry of enormous value thriving on secondary access to critical minerals. To build this industry, they have used such instruments as foreign direct investment (sovereign wealth-like financing) to establish and maintain security of supplies at the source, in effect through acquiring (partial) ownership of mines abroad, or by using active mineral diplomacy in the form of long-term agreements at governmental level.
And by now we are all too aware of China’s approach to raw material access. Where important resources are abundant domestically, China aims to keep them there using stockpiling and export restrictions. Where China is not endowed with them, acquisitions similar to the Japanese strategy are a popular instrument, and in resource-rich developing countries, China will provide for various forms of infrastructure that will help keep local ruling elites in power.
Such is the nature of strategy in the world of scarce minerals. It is becoming all too clear that free trade will lose out in the future scramble for access to rare and valuable minerals. The notion that the highest bidder in a free market will prevail is erroneous and outdated. This is not my personal economic philosophy, it is simply a statement of fact. In the future, where multiple countries are striving to equal and surpass the western world’s level of economic development, and where past hegemonies mean little, there will be no open markets for resources that are critical to the military, high tech industries or emerging clean tech industries. In a multi-polar world, where economic development is a zero sum game, and warfare is becoming a regular instrument of economic strategy, those industries that have the highest added value will be the most sought after. And these industries are increasingly dependent on scarce minerals for which substitutions are not available.
So what should the EU be doing? It should step past its obsolete free market mythology, and think strategically. It is a telling sign that the Ad-Hoc working Group defines the raw materials as ‘critical’, and not ‘strategic’. Strategic is military, strategic is bad. Well, get over it. Ever since post-war Japan started using industrial policies as instruments for economic development, there has been a strong link between strategy and economics. In fact, the EU has itself been a prolific user of strategic trade policies. Where the EU has had a powerful position in markets, it has used selective quota and taxation policies in order to achieve the highest -often political- returns. Think sugar, milk and bananas. In markets where Europe has limited or no access, public outcry and appeals to the lack of free trade principles are made. Hypocrisies abound.
It should therefore be simple to devise a strategy for coping with this scarcity of minerals problem in the EU. This strategy should be two-pronged. Firstly, where valuable minerals are present within EU boundaries: extract them and keep them. Where they are not present, buy them and keep them. In the instance where minerals are geologically present, the problem often is the sub-economic nature of deposits. The EU can provide access to these resources by subsidizing their extraction, and by building knowledge-intensive downstream manufacturing facilities all along the value chain. Particularly in the rare earths world, where additions of small drops of elements create an as yet infinite value in downstream applications, this should automatically push the EU along the path of pioneer technology and innovation, creating millions of high-end jobs and unthinkable potential for future markets. Does the Lisbon Agenda ring a bell?
Besides billions of dollars of upfront investments in technology, research, and education, this requires above all a new look at business and profitability. Instead of every company in the value chain needing to be profitable in order to subsist, a sector approach would imply that sub-economic mining activity is offset against hugely profitable downstream activity. This statement will probably be food for free market liberals claiming that if raw material prices do not correct by themselves, you will never have a profitable business, wherever you are in the value chain. Well, again, this is where the crunch lies: there will be no free markets in strategic minerals.
In the second instance, where the EU does not possess important raw materials, the very industrial policies that are abhorred by the Working Group, should in fact be used. Use diplomacy, FDI and historical ties with resource-rich countries. Buy and develop lithium, tantalum, niobium and rare earth mines where they are for sale. Scarcity is a cost issue, there are enough resources available if you pay the right price. The investment, as we have seen above, is well worth the effort.
And where will all this money come from? Haven’t we just plunged into the deepest global recession since 1933? Well, if we collectively declare human-induced global warming to be a corporate interest scam and do away with CO2 reduction investments, this would save even a small country such as the Netherlands $20-25 billion annually. Add this up for all EU countries, and we would have enough finances to really leap-frog to the fronteer of clean technology.
All it takes is a unified EU approach to strategic economic thinking. And that, I fear, is exactly where the problem will remain, at least long enough for other leaner, quicker and more unified economic powers to run away with the pie for good.
