It’s a Material World: Managing Metals and Critical Materials against All Odds
Commodity Markets under Stress
The international commodity markets are under stress. Since 2000, prices have been on an upward trajectory due to soaring demand, briefly interrupted by the financial crisis. Despite increased investments, corporate mergers, capital flows to mining companies, and a boom in non-conventional fossil energy carriers, the situation after 2013 is likely to remain tense. Newly discovered mineral deposits are generally low in concentration and yield. Quite often, they are located in inaccessible regions, where new transport infrastructures will have to be put in place. Offshore drilling and mining comes along with all kinds of challenges. Extractive projects are also beset with environmental problems and social tensions.
New players are appearing on the scene; they include Mongolia, Vietnam, and other countries where mining legislation and policies must be newly introduced. The major emerging economies are fully aware of their own strategic interests and have created state-owned mining enterprises. In parallel, resource conflicts over access to raw materials and the use of land and water resources feature in the media almost on a daily basis, along with reports about social unrest triggered by the rising costs of basic goods. The linkage between resource abundance and low scores in the Human Development Index is obvious.
One consequence of all these stress factors is extreme price volatility. At the same time, the incentives to make a quick profit in illegal markets are increasing. An estimated 20 percent of the world market in coltan—metals used in mobile communications—is illegally traded. These turbulences, in turn, expose manufacturing industries around the globe to risks and uncertainties.
More transparency of payments is an important step toward properly functioning markets and good governance. Combating corruption in mining countries via disclosure of payments strengthens democratic institutions and increases participation. Additionally, fair contracts can stabilize the income of producer countries. With resource revenues dwarfing development aid, it is by no means unrealistic to assume that a robust extractive industry and investment in sustainable development can offer promising economic prospects for the 100 or so resource-rich developing countries and their 3.5 billion people. The case of Ghana, where mining revenues for the state could quadruple from 2010 to 2011 demonstrates potential achievements if all partners agree.
Why It Matters for the Transatlantic Partners: Risks and Opportunities
This is by far not an “out there” issue. A reliable supply of minerals and critical materials is essential for manufacturing processes, including high-tech industries, clean energy, and other sunrise industries. The risk is that the current business strategies underestimate the challenges, and political will remains too weak. If so, conflicts, threats, and losses are very likely to accelerate.
The opportunity lies within innovations in better processes, organizations, products, and infrastructures that can translate into sustainable growth and well-being for the people. The German program on resource efficiency (“ProgRess”), along with awards and manifold activities on the ground, and the EU flagship project for its 2020 strategy underline such thinking. But the supply side of resource-rich developing countries should become part of the policy equation: lowering commodity price volatility and entering a stable pathway of related revenues and public investments could turn natural endowments into well-being of today’s poor.
Both sides of the Atlantic—the U.S. and Canada on the one side, the EU and in particular Germany on the other—have been pursuing quite different energy strategies lately. The boom of shale gas and other unconventional fossil fuels in the U.S. and Canada is unparalleled in Europe, where Germany has started a unique endeavor of phasing out nuclear energy while reducing CO2 emissions. What needs to be kept in mind, however, is a dependency of all energy carriers on the reliable supply of materials—there is no energy system without high-tech steel, copper, and critical materials!
Policies are needed: even though business and markets successfully allocate resources, the challenges of dealing with property rights, international trade relations, and negative externalities do not fade. The limited knowledge on dealing with the resource nexus (Figure 1)—i.e., the global interaction between the various resources required to produce fuel and energy feed-stocks, industrial inputs, and food—calls for enhanced cooperation among a variety of actors. A number of actors do not adhere to rules of fair play. The transatlantic partners should join forces and cooperate in scoping and developing policies to manage turbulent commodity markets.
Figure 1: The Global Resource Nexus
Transparency: The Dodd-Frank Act and Related Initiatives
The quest for transparency spans across countries, policymakers, and industries. Of utmost importance is improved transparency in the extractive industries of oil, gas, and mining. The first milestones have already been reached:
- The Extractive Industries Transparency Initiative (EITI) is a coalition of governments, companies, civil society groups, investors, and international organizations. Its global standard requires disclosure of corporate payments to governments and related government revenues. A country report is then produced, which undergoes independent verification. As of May 2013, twenty-three countries are EITI-compliant, including Azerbaijan, Ghana, Iraq, Nigeria, and Norway. The reported payments total around $1 trillion.
- The 2010 U.S. Dodd-Frank Act aims to regulate the financial markets. Section 1502 of the Act contains rules on the use of conflict minerals by stock exchange-listed companies, while Section 1504 contains rules on transparency in the extractive industry. Companies engaged in the commercial development of oil, natural gas, or minerals must submit annual reports to the U.S. Securities and Exchange Commission (SEC) disclosing payments made to governments at both the country (including sub-national levels) and the project level.
- On 12 June 2013, the European Parliament (EP) also decided on ambitious new transparency rules for the extractive industries—including the forestry sector—which are quite comparable to those of the SEC. As in the U.S., all payments above €100,000 made to federal, national, and regional governments will have to be published. Small and medium-sized firms are exempted from those new provisions and see their administrative burden reduced. The EP was able to remove the “tyrant’s veto” from the draft, a clause exempting companies from the reporting where a host country’s criminal law bans such disclosure.
The non-governmental organizations Global Witness, Oxfam, and Publish What You Pay (PWYP) are particularly active in ensuring transparency. The International Monetary Fund (IMF), World Bank, and the Organization for Economic Cooperation and Development (OECD) have been long-standing supporters with own transparency guidelines; Rio Tinto and other mining companies have been voluntarily publishing such data from early on. In relation to the EITI, however, it should be noted that none of the major emerging countries has signed up to the initiative and that the attitude toward transparency in these countries makes international analysis of supply chain due diligence far more difficult.
Despite stiff opposition from parts of industry to the adoption of any new regulations, things are moving forward. In August 2012, the SEC adopted the long-awaited rules to implement the relevant provisions of the Dodd-Frank Act.
In May 2013, the New York-based think-tank Revenue Watch produced the Resource Governance Index, measuring the quality of governance in the oil, gas, and mining sector of fifty-eight countries, particularly in Africa and Asia. The coverage by far exceeds EITI coverage. Only eleven countries are assessed as having satisfactory resource governance; in particular the countries from the Middle East, Africa, and Asia rank low.
The Africa Progress Report 2013, launched by Kofi Annan at the World Economic Forum, paints a cautiously optimistic picture of the future for this resource-rich continent. It confirms that progress has been made on democracy and transparency, for example in Senegal and Côte d’Ivoire, but also warns about land speculation.
Impacts So Far
Initial experience with implementing the transparency rules clearly reveals a willingness to learn. Initial skepticism about the EITI, and especially its readiness to apply stringent criteria to mediocre reports and demand improvements, has proved to be unfounded: the EITI has gone as far as suspending some countries’ membership for non-compliance. At the other end of the spectrum, Guinea, Ghana, and Liberia have actually outperformed the standards. Over time, the indicators and evaluation criteria, e.g., on participation, have been improved as well. The EITI, in cooperation with its partners, is also offering training programs and engages in capacity building. All its reports have been published and were evaluated in early 2012. In May 2013, the EITI agreed on a new and improved set of standards.
Parts of the industry are still concerned about competitive disadvantages, mainly with regard to compliance costs and a disclosure of sensitive commercial information. Given the wave of political will and support for the new rules, especially by mining companies, the lawsuit filed by the American Petroleum Institute against the SEC is not very likely to succeed. It remains to be seen whether the costs of implementation for industry will prove to be as high as some fear and whether other perceptions of abandoning projects or selling assets under price will come true. Both the SEC and the European Commission estimated the initial total costs for industry to be in the order of U.S. $ / € 1 billion, if an ambitious approach is adopted. Typically, however, the outlay then decreases significantly over time. Experience gained with implementing EU environmental directives also shows that the predicted costs of implementation are generally higher than the subsequent actual costs. By participating in EITI, parts of the extractive industry are also pursuing strategic interests: the forthcoming years for mining are likely to be challenging and its state-subsidized rivals have competitive advantages, so companies are now seeking to secure their positions by developing new business models and establishing reputational advantages.
In crisis regions, the outcomes are mixed. One question is whether transparency genuinely creates incentives for the establishment of democratic and inclusive institutions and supports the move toward sustainable development, or whether fragile states are more likely to be in thrall to criminal organizations and authoritarian structures. The eastern regions of the Democratic Republic of the Congo (DRC), for example, saw renewed clashes in late 2012/early 2013 that have complicated implementation of the new rules. Simultaneously, the International Conference on the Great Lakes Region—an intergovernmental organization composed of eleven member states of that region in Africa promoting peace, security, democracy, and development—has gained more support in the region and, facing the threat of market losses in key industrial countries, is seeking to improve its cooperation in relation to the external resource trade. However, far more mobilization of political will in the region, in the U.S., and in the EU will be needed in response to these challenges.
Potential Mid-Term Impacts, Risks, and Opportunities
The future challenges begin with non-compliance and enforcement. In the U.S., the transparency of extracting shale gas and other unconventional fuels as well as the management of extraction revenues in domestic native land may become an issue. Access to information on exploration data and environmental impacts might also become an issue. But there’s even more to it. Globally, the major emerging economies may continue to evade transparency standards; their market power and influence in world-wide growth markets hamper international coordination. In this context it is encouraging to see Russia sign the G8 Lough Erne declaration on transparency in such payments. The challenge of achieving good governance in emerging economies and developing countries demands a properly functioning fiscal system, legislation that supports a sustainable mining industry, and “inclusive” institutions that promote transparency, participation, and sustainable development.
Regarding resource use, the challenges lie primarily in dealing with the resource nexus, i.e., the global interaction between the various resources required to produce fuel and energy feed-stocks, industrial inputs, and food (see Figure 1). While energy–water–food is a much-discussed nexus, this interaction applies to mineral resources and land use as well, forcing extractive industries to address the resource nexus. As expressed by the G8 declaration, land transactions should be transparent and respect the rights of local communities; this may have to include a right to water and food security.
Ultimately, the issue is about property rights and benefit-sharing. In 2011, the revenue from Nigeria’s oil industry was 60 percent higher than total official development assistance (ODA) for the sub-Saharan African countries. The profits of the largest mining companies in 2010 amounted to around $3 trillion. ExxonMobil reported total profits of $45 billion for 2012.
The energy and mining companies have traditionally been in a strong negotiating position in resource-rich developing countries, and these companies’ powerful position was reflected in many of the contracts concluded. However, this situation has changed. The nationalization of a subsidiary of Spain’s Repsol in Argentina in 2012 once again underlined the shift in power toward the major extractive countries. The International Bar Association has drafted a model contract, known as the model mining development agreement (MMDA), which aims to achieve a balance of interests between the parties.
Scenarios for the Future
A possible risk scenario for the future is that the emerging economies stay aside, and a transparency divide deepens between some supply chains doing due diligence and those not. Especially in growing markets with short-term innovation cycles, price-driven competition, and low awareness on the consumer side, such risk cannot be overlooked. The existing conjecture between illegal trade markets of all kinds (drugs, trafficking, resources, etc.), organized crime, terrorism, and poor governance thus should be monitored. Supply chain security, international security, and human security are mutually reinforcing this issue and continuously call for political will to go beyond the current scope of transparency in the extractive industries.
Another scenario may grasp the opportunities of eradicating poverty, achieving sustainable fiscal systems, and implementing better governance in resource-rich developing countries. Establishing green sovereign wealth funds from resource revenues that potentially leverage investments in clean energy and resource efficiency from assets worth round $3 trillion (2011)—estimated to be twice as high as global hedge fund assets—would create a difference. Such a scenario would come along with positive side effects for supply chain security, lower price volatility, and stable expectations that favor eco-innovations.
In such scenarios, the future of EITI will be decisive for a number of reasons. First, this organization has had huge success in the previous years. The existing regulations in the U.S. and EU may replace some of its functions. However, there is much to be gained if the EITI manages to extend its outreach to emerging economies, to indicators on environmental impacts, and to public expenditures. In addition, it may use its national stakeholder groups for deliberation processes on those issues.
Managing Critical Materials: Riding Alone or in a Transatlantic Alliance?
Despite all enthusiasm about unconventional fuels and the prospering markets for most renewable energies, their inter-linkages with critical materials should remain a concern. Markets for critical materials are different from other metals and natural resources in many regards: While they are characterized by high value per unit, it’s a highly specialized industry and not big business. Most transactions are done via contracts. Spot markets and stock exchanges play a minor role. As a result, the industry is shrouded in secrecy and transparency is lower than in other extractive industries. Thus, increasing transparency will be a key to deliver better market outcomes.
It’s exactly here where the U.S., Germany, and the EU have joint interests: their dependencies on international supply are enormous, and the need for improving the international market order, better information, and for managing the resource nexus is obvious. So far, activities such as the U.S. Department of Energy studies on criticality, the EU Raw Materials Initiative, and the German industry’s Raw Materials Alliance have been predominantly at a unilateral level.
The WTO case on rare earth elements in which the U.S., EU, and Japan have filed a suit against China—claiming unfair export restrictions on the Chinese side—is one step toward a more coordinated approach. A dispute panel has been established and may deliver a report in late 2013. However, the timetable and the results of the dispute settlement process are highly uncertain. It interacts with a previous case on rare materials, with the China Protocol on the WTO accession, with a current case of the EU filed against China on solar panels, and with trade policy in general. For those reasons, the door for better cooperation should remain open.
Impacts So Far
One of the most immediate impacts of this concern has been a revitalization of domestic mining in many countries. The U.S.—as well as the European continent—have rich geologic endowments that potentially could be used. However, it remains challenging. The re-opening of the U.S. rare earth mine at Mountain Pass, CA, in 2012 illustrates the gap between good will and reality. Prices for most rare earth products declined sharply in 2012 due to the sluggish economy and improved material efficiency. The Molycorp Inc. CEO Mark Smith departed in late 2012 despite good strategic decisions on getting property rights. The SEC investigates against the company, among other things, on the accuracy of its public disclosures, and it faces a lawsuit alleging citing engineering deficiencies at its Mountain Pass mine. Local environmental concerns and land use issues may lead to further risks.
On the research side, the recently established Critical Materials Institute in the U.S., led by the Ames Laboratory in Iowa, will research materials and engineering; this scope may overlook geopolitical and economic issues. On the German side, the establishment of the Raw Materials Alliance may lead to interesting new business models of vertical integration, while new institutes in Freiberg and Wuerzburg shall develop new materials and foster recycling. Again, the research angle on politics and economics is still relatively weak.
Potential Mid-Term Impacts, Risks, and Opportunities
One of the mid-term risks can be characterized as “the tail wags the dog”: the modern steel, automotive, electronics, ITC, and other industries will remain dependent on a secure supply of such materials. The technological and strategic relevance of such materials by far exceeds their relatively low share in production costs. In addition, a mineral such as phosphorus is an essential and non-substitutable ingredient for world food markets. Again, the resource nexus comes in and may trigger a spiral of fragile supplier countries breaking down and being unable to deliver, while strong suppliers misuse their market power. As in one of the scenarios above, a global divide with shady markets and ensuing business risks might emerge that interlinks with the agenda of security and the environment.
A plea stemming from such analysis is a need to reconsider the assessment criteria for criticality. So far, both the U.S. and the EU studies mainly focus on geologic scarcity and concentration in the supply chain. What needs to be reinforced is the critical conjecture between environment and security and an international market order that may have broader impacts at the level of regions and countries.
At the same time, there are opportunities related to the potential establishment of an international multi-level resource governance system along and across supply chains: better management of material flows within and horizontal to products and infrastructures will require good American business spirit, German engineering, and a European sense of cooperation. Economic modeling studies as well as consultancy reports have revealed enormous profits and long-term benefits that can be reaped in the future, if strategies for sustainable mining, processing, and resource efficiency merge. With regard to critical materials, the perspective would be the establishment of a world-wide recycling system with a few highly specialized facilities in key regions that are backed by good data about market developments and ensuing policies.
Conclusions and Recommendations
Stronger coordination and leadership is required. A driving force could be the vision of increasing revenues and public investments in resource-rich developing countries, with prosperity stemming from increasing resource efficiency and lowering risks. Witnessing recent successes on the transparency agenda, however, it is essential to ask for more (Figure 2):
- All financial transactions relating to upstream activities in the value chain should be disclosed, including state-owned companies and sovereign wealth funds. Downstream, the international markets for recycling and disposal should be included. This would also help to increase resource efficiency.
- A consequent next step is the extension of transparency to related contracts and public budgets with their expenditures.
- Transparency efforts should reach out to emerging economies, while the EITI stakeholder processes could turn into a powerful tool promoting national action plans for sustainable resource management.
- An international, open-accessible data portal on resource use should be established to include core data of geological services and other organizations such as FAO, IEA, and JODI as well as data on environmental pressures from resource use, water use, and coefficients for resource-intensive areas of production.
- Resource-rich developing countries could introduce extraction taxes and support new fiscal systems, which promote employment, poverty reduction, education, research, and innovation. The Natural Resource Charter and other tools might also be of use in establishing better governance.
Key flanking initiatives at the international level could include a multi-stakeholder forum for sustainable resource use, an international metal covenant to promote recycling and material flow management with industry involvement, and, over the longer term, an international agreement on sustainable resource management.
Notwithstanding all the positive prospects for the resource-rich developing countries, one aspect cannot be ignored: the sustainable management of natural resources requires global coordination with leadership from the U.S. and EU. Resource efficiency is therefore the right way forward and should be developed further in the context of reduction scenarios.
Figure 2: Transparency as a Catalyst for Sustainable Resource Management
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 Stands for: columbium(niobium) and tantalum; see on the data Bleischwitz, Dittrich, Pierdicca 2012.
 See e.g., Aaronson 2011; Haufler 2010.
 See Humphreys 2012.
 See the U.S. statements in this process at: http://www.ustr.gov/trade-topics/enforcement/dispute-settlement-proceedings/wto-dispute-settlement/pending-wto-disputes-1
 See, for example, the McKinsey Global Institute Report from 2011.
I’m grateful to AGI and its staff for a fantastic fellowship opportunity. During that time I was able to contact the following experts who shared valuable information and perspectives with me: Eduardo Aleman, Evan Armstrong, Diana Bauer, Erik Brattberg, Matthew Burrows, Philip J. Daniel, John H. DeYoung Jr., Sebastian Ehreiser, Hilary French, Vanda Felbab-Brown, Virginia Haufler, Marc Levy, Jennifer Li, Frank Loy, John Meakem, David Menzie, Kate McNulty, Alexander Ochs, Cyrus Wadia, Michael Weber. We also had a seminar on those topics at the AGI on June 25th, 2013, where participants contributed useful viewpoints. The usual disclaimer applies. I owe special thanks to Patrick Schmitz for excellent research support at AGI, and Jessica Riester Hart for editing.
Prof. Dr. Raimund Bleischwitz was a DAAD/AGI Fellow in May-June 2013.