Posted Sep 28, 2022, 10:28 AM
Ursula Van Der Leyen’s speech on the “State of the Union” could not really come as a surprise. The energy crisis indeed justifies that attention is focused on the necessary reform of the electricity market, the defense of purchasing power or the limitation of “superprofits”.
It also legitimizes the questioning, among other subjects, of the future of liquefied natural gas whose imports are as much an immediate solution as an element of vulnerability in the medium term. It is, in the longer term, the ambition to decarbonise our economies that is at stake. The President of the Commission therefore also had to reassure on this subject by demonstrating that Europe was not going to repeat its past mistakes. .
Build up strategic stocks
Initiated since 2020 with the “European Raw Materials Alliance” and now declined in its operational aspects, the European policy of access to mineral resources of the environmental transition appears coherent and ambitious. Well known, the statement does not suffer from any ambiguity. Because it requires the simultaneous promotion of the electrification of uses and carbon-free electricity, the environmental transition results in an almost exponential demand for lithium, cobalt, nickel or graphite used in the batteries of electric vehicles, as well as rare earths for permanent magnets.
Due to the announced imbalance between supply and demand, but also to the pre-emption initiated many years ago by China, it is therefore essential to guarantee access to these resources and to be able to serve, through flows and stocks, the European and French manufacturers who depend on them. As suggested by the Varin report presented to the government at the start of the year, this means increasing our position in the upstream extractive sector by opening continental mines and acquiring international stakes. It is also necessary to strengthen the collection and processing capacity of recycling industries such as refining and – probably – to build up strategic stocks in accordance with the announcement made on this subject for lithium and rare earths. However, is this sufficient? It is not certain.
First come, first served
These strategies for securing supplies and storage are only relevant with reference to the purchase price of the resource in question. Europe certainly had no choice but to urgently buy liquefied natural gas to ensure that it would have sufficient stocks to tackle the winter period. Doing so at record prices, it could nevertheless not preserve the price competitiveness of many industrial sectors whose future is today very uncertain.
Such a situation cannot be repeated for critical mineral resources. The essential question is therefore not only to know how France and Europe can have sufficient quantities of lithium, copper, nickel or cobalt, but to ensure that they will benefit from tariff conditions equivalent to or lower than those of foreign competitors. First come, first served: the lead taken by Chinese operators is currently limiting our ability to do so. Solutions must therefore urgently be found, but they are few in the economic field alone.
A possible fall in prices
It will be opposed to this analysis that this problem of prices is indeed present in the European plan. However, in its second pillar, it considers only one aspect: their increase. This assumption is perfectly reasonable. What is probable is however not certain and it would be wrong not to envisage a symmetrical situation. Slowdown in demand due to lower economic growth, technological developments, bearish speculation: there are many situations that can explain a fall in prices. We can rejoice if this decline is part of the long term and if it only results from an unexpected rebalancing of the market.
A much more unfavorable hypothesis must however also be mentioned: that of an artificial and temporary fall linked to a voluntary saturation of the market aimed at creating the – misleading – feeling that the risk of shortage has been removed. In the absence of corrective measures, the consuming industries having previously secured their supplies at a fixed price would then be condemned to buy their strategic inputs above the market price and the producing industries to suffer from lower economic profitability. This decline could also discourage investors and lead mining, metallurgical or recycling companies not to receive the financing necessary for their development.
The Illusion of Abundance
Let us agree: it is not a question of asserting that the prices of these mineral resources will decline, but of accepting the probability – however low it may be – that this situation will occur, of understanding the industrial and geostrategic risks that it bears, then to develop the appropriate strategy to limit its effects. With China’s hegemony over rare earths or the monumental gas revenues garnered by Moscow, we cannot forget that relations of dependence are often built on the illusion of abundance.
Instability is consubstantial with global commodity markets, whether strategic or not. Europe must therefore adapt to this fundamental reality to guarantee industrialists the economic conditions for their sustainability. From the systematic management of price risk within European sectors to the implementation of a trading entity that can take full advantage of price volatility, there are many measures to consider in addition to current systems. It is up to public decision-makers to take an interest in it. In this struggle to access strategic raw materials, the capacity for resilience is an asset… so is agility.
Yves Jegourel,Professor holder of the Commodities Economics Chair at CNAM, co-director of the Cercle CyclOpe, Senior Fellow, Policy Center for the New South
