Europe is blessed with many things but lacks abundant and accessible mineral resources and processing infrastructure.
Industrially, Europe has positioned itself as a center of excellence for research and development and high-level production, far from the challenges of raw material extraction and processing. Politically, Europe has driven the global agenda in the best practices of environmental, social and governance. These policies have to some extent strengthened the region’s isolation from the commodity world
All of this has been realized in a world where supply chains have merged globally. But Ukraine’s aggression risks moving too far away from the source of the supply.
In light of Russia’s dependence on oil and gas, Europe’s immediate priority is to find alternative energy sources. However, if the region is to be globally competitive in manufacturing, especially automobiles, it must also secure reliable access to raw materials. Due to the importance of lithium, nickel, copper and cobalt for electrification, rare earths, industrial and battery metals are important fields to prioritize.
The decarbonization of the world economy is one of the reasons that Europe has rightly become a champion. The region has developed the most sophisticated carbon credit market. It was also the first to set a clear threshold for recycled materials in the production of electric batteries. The world is following the leadership that Europe has established.
But European companies need reliable and affordable products to produce the products they need in a decarbonized world. In this case, Europe itself is naturally not much less prosperous than the United States or Canada. It also lags far behind China, which is deliberately building its supply chain on these important minerals.
In the long run, China wants to sell not only European battery products or even batteries, but also their powerful consumer goods. China understandably wants to retain much of the associated value creation from its own investment in electrification. This poses a much greater existential threat to Europe’s production base than short-term gas shortages or even long-term fuel inflation.
In order to be able to secure the supply of these important minerals, European manufacturers must fundamentally review how they interact with the collection. Western mining companies also need to rediscover their own appetite for risk.
Over the past two decades, the exploration and development departments of Western miners have been systematically downgraded. There is a growing focus on large-scale mining in developed countries, particularly in North America and Australia. This trend has been much more pronounced in metals than in the energy market. Even Latin American democracies, such as Chile, have been seen as unacceptably high risk for growing capital.
Yet it is an inescapable fact that huge reserves of critical minerals are not located in the first geographical region of the world. The West, especially Europe, cannot ignore such developing markets. Both investors and NGOs should acknowledge that their influence here was and will be substantial.
There is an opportunity for Europe to lead the reconnaissance of the best exploration and development projects with capital where it is most and responsible. The ESG leadership does not need to leave Europe, but rather it should create a blueprint for the development of emerging markets, especially Africa, where there is a growing supply.
In this emerging economy, there is ample opportunity for Europe to assist in the development of the processing sector. This will enable developing counties to share more than the total value of the underlying material excavated there. Initiatives such as the Fair Cobalt Alliance should be supported and replicated
Perhaps the DRC will not yet manufacture European cars, but there is no reason to continue exporting crude ore, wholesale to China. European manufacturers must re-evaluate how they deliver reliable long-term materials. This would probably include direct investment in mining resources.
Europe also needs to rebuild its own refining and melting capacity, especially given the increasing importance of recycling in decarbonization. The current “not in my yard” position can only be changed by government policy.
Energy consumption will remain a problem, but it must be balanced with supply security. Europe can no longer afford to outsource what could be challenging, dirty or cheap anywhere else.
Europe must collectively face the obvious challenges posed by the war in Ukraine or risk becoming a production museum and mere holiday destination.
Paul Smith is the non-executive chair of Trident Royalties
Product notes are an online CComments on the industry from the Financial Times
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