U.S. and EU talk of collaborating to ensure energy security in the renewable age. A bigger priority should be strengthening trade links with big mining nations.
By guest author Stephen Wilmot from the Wall Street Journal
March 13, 2023
Diplomacy has a role to play in creating non-Chinese supply chains for renewable energy—but not this kind of diplomacy.
Politicians are talking a lot about critical minerals: metals, such as lithium and rare earths, that today are turned into valuable manufacturing inputs mainly in China, and that in the future will be needed in much greater quantities for things like electric vehicles and wind turbines. On Friday, the subject played a starring role in a meeting between U.S. President Joe Biden and European Commission President Ursula von der Leyen. This week, the European Union will launch a Critical Raw Materials Act to improve its green-energy security.
Investors have a lot riding on critical minerals too. Last year, battery costs rose for the first time in recent history due to supply-chain bottlenecks that pushed up metal prices. EV startups and wind-turbine manufacturers struggled, while mining stocks soared. The tide has turned a bit this year amid signs of softening EV demand. Given the difficulty of bringing new mines online, though, shortages could soon be front and center again.
Against this backdrop, you might expect the political focus to be on expanding supply. Instead, a lot of talk lately has centered on coordinating demand through buyers’ clubs. This is a big part of the EU bill, based on previews, and it was also a talking point between Mr. Biden and Ms. von der Leyen. Washington reportedly wants to coordinate buying among Group-of-Seven nations, as it has with Russian oil.
The EU struggled politically to deal with competitive bidding among its member states first for vaccines during the Covid-19 pandemic, then for natural gas after Russia cut pipeline supplies last year. It understandably wants to avoid similar problems with new-energy metals. But high vaccine and gas prices caused by competitive bidding also generated results: Europe got vaccinated and gas inventories were refilled. Likewise, last year’s sky-high lithium prices triggered investment. Politicians dull price signals at their peril.
A more useful focus for critical mineral strategies is making sure the market can respond to price signals. The EU bill aims to speed up permitting processes to no more than 24 months for mines, and just 12 months for processing plants. If it can walk this talk—which might be challenging given the power of local politics in permitting—it will make a difference.
What is conspicuously absent from any EU proposals reported to date is dedicated subsidies to accelerate projects in the region. In the U.S., critical-mineral miners and refiners can write off 10% of their costs as part of last year’s Inflation Reduction Act. So far, the EU has responded only by making it easier for its member states to match U.S. offers if there is a risk of a project relocating.
The elephant in the room on both sides of the Atlantic is that there can be no such thing as self-sufficiency. Australia and South America are currently the big producers of lithium; Indonesia leads nickel output. The EU hopes to mine just 10% of its domestic critical-material needs in 2030. In the U.S., manufacturers will eventually need to source most battery metals or inputs from U.S. free-trade partners to qualify for the new EV tax credits, but Washington pragmatically intends to take a very broad view of who qualifies.
Ms. von der Leyen was in town last week partly to make sure the EU counts, but this isn’t much help to U.S. EV makers: Land-poor Europe will never be a big mining region. With renewables as with fossil fuels, developing diplomatic relations with big producer nations will be key to energy security. Talks between worried buyers are a sideshow.