Insight: privatization of raw materials is driven by green transition

The energy transition to a low-carbon world is mining-intensive and vulnerable to resource nationalism. To achieve the zero-emissions target by 2050, the pivot toward reducing greenhouse gases will spur unprecedented demand for some of the most critical materials used in renewable energy generation and storage. From solar panels to wind turbines, battery storage, electric vehicles, and electric cables, green technologies, and infrastructure rely heavily on diverse minerals and metals. To keep global warming below 2 degrees Celsius, the production of graphite, lithium, and cobalt will have to increase by more than 450 percent by 2050 compared to 2018 levels - and that is just to meet energy storage demand.

By 2030, at least 300 upcoming mines - for materials such as cobalt, copper, graphite, lithium, nickel, rare earth elements (RRE), and vanadium - will be opened sometime in the future.

Concerns about potential supply shortages have begun to surface. Studies warn of a chronic gap between the supply and demand for copper that could worsen by the middle of this decade. This could cause serious consequences for the global economy.

However, most studies on the outlook for metals and minerals supplies generally assume that the status quo in the industry structure will remain stable. Furthermore, they claim that the risk of significant disruption to that structure has been largely overlooked. When a natural resource acquires significant strategic importance and its value increases accordingly, it attracts state intervention and control.

This can take different forms, from higher taxes to the creation of state-owned enterprises with equity participation in various projects, export controls, and even nationalization. Such a rise in resource nationalism will have significant consequences for investment pace and scale, supply security, and prices. This will significantly increase the cost of the energy transition and risk delaying it.

The expected shortage of critical materials

Given the projected massive increase in metal consumption up to 2050 under a net-zero scenario, the International Monetary Fund (IMF) is concerned that current growth rates in the production of metals such as graphite, cobalt, vanadium, and nickel are inadequate, resulting in a gap of more than two thirds. The shortages of copper, lithium, and platinum are expected to range between 30 and 40 percent of demand.

Higher prices should stimulate more investment in the industry and as a result, the gap between supply and demand would dissipate over time. This is true in market-based economies where resources are available and accessible. In practice, several problems can hinder the market response.

However, having sufficient resources alone is not enough. Venezuela sits on the largest oil reserves in the world, but ranks only 25th in production. This is due to lack of investment after years of adverse government policies and sanctions imposed over the past several years.

Before engaging their capital, investors consider a combination of factors, especially when dealing with capital-intensive projects that require significant upfront financing, involve geological risk, and have a long payback period. These characteristics are typical of extractive industries such as mining, oil and gas. Availability of resources is only one factor in assessing investment attractiveness. Other essential variables include infrastructure cost and availability, as well as licensing and contractual terms. Taxation and political risk are also particularly relevant.

Resource concentration and political stability

The high concentration of mining and manufacturing reserves in some locations raises concerns among importing nations. A recently published UK government document defines the critical threshold for production concentration. The top three oil and gas producing countries account for 43 and 46 percent of the world’s oil and gas supply, respectively. By contrast, the world’s top three producing nations control more than three-quarters of the global production of lithium, cobalt, and REEs. The Democratic Republic of the Congo and China account for 70 percent and 60 percent of global cobalt and RRE production, respectively (2019 data).

The document concludes that the risk of anti-competitive behavior aimed at limiting the international supply of a natural resource is, therefore, greater for some metals and minerals than for resources such as oil and gas.

Similarly, the International Energy Agency (IEA) warns that high levels of concentration increase the risks from physical disruptions, trade restrictions or other developments in major producing countries. Furthermore, according to the Austrian Federal Ministry of Agriculture, Regions, and Tourism, most producing countries are politically unstable, which increases the risk and cost of doing business. Additionally, the management of natural resources in many of these locations is "suboptimal," as the International Council on Mining and Metals (ICMM) said. The political and economic stability of producing countries, affecting supply risk, is a key factor in classifying what constitutes a "critical mineral" – the other being its economic significance.

In addition, the sector has strategic importance in all those countries, particularly where it provides the backbone of their economies, and is the primary source of government revenue. Countries are considered resource dependent when metals and minerals account for more than 20 percent of exports by value and mining rents are more than 10 percent of the country’s gross domestic product (GDP), according to the ICMM. In many developing countries, this threshold is easily exceeded.

Meanwhile, some have expressed concern that mining companies (particularly those operating in Africa) have been given too many tax breaks and subsidies, leading to an unfair erosion of taxable income and paving the way for upward revisions to tax conditions. Such a scenario becomes a reality when the industry enjoys higher profitability in a high-priced environment.

High risk of resource nationalization

All of the above factors - from the concentration of production and reserves to the strategic importance of the industry and especially the potential for high prices - create fertile ground for an increase in resource nationalization. There are various measures a host state can use to increase control, capture a larger share of the proceeds, and acquire new or higher ownership of projects at the expense of foreign participation.

This phenomenon is well-known in the oil industry. It proliferated around the 1950s as oil’s strategic importance to local and global economies became more visible. Some of its manifestations include the emergence of more assertive host governments culminating in the birth of OPEC in 1960, the abolition of previously granted concessions and their replacement by new, more restrictive types of contracts that limited the participation of the private sector and their ownership of production, the creation of national oil companies and, in many cases, the nationalization of assets.

The mining industry has also seen a similar wave of resource nationalism, albeit with a more moderate impact. This happened during the three decades following World War II, which saw strong growth in production and metal prices. However, the trend peaked in the mid-1980s as prices fell and industry profits declined. During the 1990s and early 2000s, the pendulum swung in the opposite direction in tandem with metal prices, leading to their lowest levels in over 30 years. Many developing countries have privatized the mining industry and opened it to foreign investment.

The price recovery, particularly following the 2008 financial crisis, continues to this day and has created new ambitions for mineral-rich countries. In April 2023, Chile’s government announced its intention to nationalize the country’s lithium industry. The risk of other resource-rich countries following suit is significant.

Governments acquiring a stronger presence in the industry and a larger share of mining revenue is not alarming – after all, they are the sovereign owners of the resource and should secure a fair share of the proceeds. Furthermore, while fiscal stability is a key tenet of an ideal tax system, tax terms are not set in stone. They may be revisited if conditions change and the initial terms offered to investors do not adequately adapt to the new circumstances.

However, there is a risk that an increase in resource nationalism could create negative conditions for investment at a time when it is urgently needed. This is especially true in many developing countries where the institutional framework is weak, the government lacks the administrative capacity to implement changes in an orderly manner, and existing tax terms are unnecessarily complex and distortive.

The success of the energy transition will largely depend on countries getting the balance right. In a 2017 report, the World Bank stated the obvious, saying that "a low-carbon future will not be possible without minerals."

Original article published on Money.it Italy 2023-06-06 07:44:05. Original title: [Come la transizione energetica sta spingendo alla nazionalizzazione delle materie prime?—>https://www.money.it/come-la-transizione-energetica-sta-spingendo-alla-