House of Commons - Strategically important metals - Science and Technology Committee

Strategically important metals - Science and Technology Committee Contents

3 Trade and geopolitics

37. There are significant threats to the supply of strategic metals. The report on Materials Scarcity by the Resource Efficiency Knowledge Transfer Network (REKTN, now the Environmental Sustainability Knowledge Transfer Network—ESKTN) identified the following eight threats to assess the security of supply of a material:

i. Global consumption levels

ii. Lack of substitutability

iii. Global warming potential

iv. Total material requirement (how much material is dug from the ground to produce a given quantity of metal)

v. Scarcity

vi. Monopoly supply

vii. Political instability in key supplying regions

viii. Vulnerability of key supplying regions to climate change.[47]

38. It was the view of Wolf Minerals Ltd, a mining company developing a tungsten reserve in Devon, that for the supply of strategic metals "the UK economy has relied for decades on the laissez-faire concept that other nations will provide".[48] Some concerns have been expressed about this attitude: for example, Nicholas Morley, Director of Sustainable Innovation at the sustainability consultancy, Oakdene Hollins, attributed supply issues of some strategic metals to "what might now be seen in hindsight as a naïve belief in the permanency of free markets for [businesses] raw materials".[49]

39. Free markets are markets in which goods and services are exchanged at a price agreed mutually by the producer and consumer. In a free market, changes in supply and demand result in a change in the prices of goods and services. Supply and demand are therefore important factors in the trading of strategic metals, and we investigate them in this chapter. However, the trade in strategic metals is affected by other factors—for example legislation—that we also discuss.

Metals supply

ARE METALS RUNNING OUT?

40. Key to the operation of the market is supply. As we have noted, metals naturally occur in minerals within the Earth's crust. Minerals are extracted from the ground and processed to purify the desired metal. A metal "resource" is the total amount of a metal in the Earth's crust, while a metal "reserve" is the metal present in minerals with sufficient metal concentrations that make it economically viable to extract.[50] Metal reserves are distributed unevenly across the world.

41. The estimated reserves of strategic metals vary. For example, at current consumption rates, indium reserves will last for 13 years and platinum will last for 360 years.[51] However, in its written submission, the Royal Society of Chemistry (RSC) explained that despite the removal of vast quantities of metals from the ground over the past 50 years, "reserve levels have remained largely unchanged" due to improved technology, the discovery of new reserves and price increases leading to the exploitation of lower grade minerals.[52] Research Councils UK stated that "much of the concern over physical exhaustion of geological reserves of strategically important metals is likely to be misplaced, though there are no grounds for complacency".[53]

42. This view was supported by Anthony Lipmann, Managing Director of Lipmann Walton & Co Ltd and former Chairman of the Minor Metals Trade Association (MMTA). When asked whether he thought there was a shortage of strategic metals he said "no. I do not [...] in practice, you just dig deeper".[54] Mr Lipmann's view was that dwindling supplies resulted in increased prices, which in turn facilitated the extraction of metals from previously uneconomic resources (lower grade minerals). Higher energy costs are a particularly significant factor in the exploitation of lower grade minerals to extract a metal,[55] and thus in their financial viability. The corollary is that the supply of metal is vulnerable to increases in energy costs.

43. Digging deeper will also come with a higher environmental impact. Higher environmental impacts and energy use are in themselves undesirable and Mr Morley pointed out that "the increasing environmental impact of mining, extraction and purification [are] likely to lead to limits in production before absolute scarcity became significant".[56] The desirable improvements in social and environmental standards of mining activity will also lead to an increase in the price of a metal.[57] Social and environmental impacts are discussed in detail in chapter 4.

44. Most strategic metal reserves are unlikely to run out over the coming decades. In practice, improved technology, the use of alternative materials and the discovery of new reserves are likely to ensure that strategic metals are accessible. There will, however, be significant environmental and monetary cost associated with the exploitation of lower grade minerals.

NATIONAL MONOPOLIES

45. To achieve efficient resource use, a principle of free market economics is that there are a number of producers competing to supply consumers; this sets a market led price. However, where monopolies (supply controlled by a single company or nation) and oligopolies (supply controlled by a small number of entities) dominate a market place, they can distort the market price to benefit themselves. The RSC pointed out that:

Metal deposits are unevenly distributed across the globe [...] this is of particular concern for the UK, as only 5% of the known worldwide metal reserves are found in Europe.[58]

46. The uneven distribution of metal resources favours the emergence of supply monopolies and oligopolies as some metal reserves are found in only a few countries.[59] There are a number of national monopolies and oligopolies in metals markets, for example: China produces over 97% of the world's rare earth elements;[60] Brazil accounts for 92% of niobium extraction;[61] 62% of chromium is extracted in South Africa and Kazakhstan;[62] and cobalt production is dominated by the Democratic Republic of Congo.[63]

47. It is not just the geographical distribution of reserves that can cause supply monopolies and oligopolies. They also arise because of economic and political factors. Differences in comparative advantage, and regulatory frameworks, between countries with metal reserves mean that production costs can vary significantly. Consumers of strategic metals tend to buy from the nation offering the lowest price, which can lead to the reduced economic viability of metal production in nations with higher production costs.[64] Production can then become highly concentrated in the single nation with the lowest costs.

48. The ESKTN explained the problems posed by monopolies and oligopolies in supply and trade:

UK manufacturers would like equal access to metals. If this is the case then, even if the price is high, availability is roughly equal for all users and so there is fair competition. However if the supply of a particular mineral or metal is controlled by a small number of entities (be they countries or companies) there is a risk that they may exploit their monopoly/oligopoly to control the market or favour certain clients.[65]

49. In a free and competitive market, the location of reserves overseas should of itself pose no threat to the UK. However, monopolies and oligopolies inhibit competition, reducing the benefits of free trade and leaving the market open to higher prices and unpredictable changes in price.

China and the rare earth elements

50. In any discussion of monopolies and oligopolies in the metals markets, China and its control of rare earth element (REE) supplies is frequently cited. The Geological Society of London stated that "global production of REEs is located at a small number of mines in China, although there are known reserves elsewhere, and every prospect of finding more".[66] The Institute of Materials, Minerals and Mining (IOM3) were of the opinion that there were some "mines [outside China] that were recently closed because of low cost competition from China".[67]

51. As China currently supplies over 97% of the world's REE raw material, Chinese export quotas are the dominant limitation to supply of REE raw material around the world. However, the amounts of REE raw material that come directly from China to the UK are not large. We heard that a company called Less Common Metals are the only UK based user of REEs in their raw form.[68]

52. REE use in the UK was described by Dr Gareth Hatch, Founding Principal of Technology Metals Research:

very little REE raw material is presently used to produce components in the UK. It is in the use of semi-finished and finished goods such as permanent magnets and other components, and the devices and systems created from them, that companies in the UK generally interact with the rare-earths supply chain.[69]

REE products are also used in oil refining and Dr Mike Pitts, from the Industry Technology Division of the RSC, told us that "they are used in about every consumer product you can think of in electronic equipment. You are all carrying some around in your briefcases, I assure you".[70] China does not, however, dominate, nor restrict, supply of downstream goods which incorporate REEs.[71] Dr Hatch noted that, in terms of trade, the use of REEs in finished goods was less problematic than using them in their raw form because Chinese export quotas do not apply to semi-finished or finished goods that are produced in China.[72]

53. Rt Hon David Willetts MP, Minister of State for Universities and Science, confirmed that, because the UK was not a primary manufacturer of goods requiring raw REEs, the UK was in a better position than, for example, Japan:

at the moment we tend to be rather further down the chain than Japan. We tend to buy and import products, which can be components that we are doing further work on, but we tend to import products and components where an intermediary country has itself bought the Rare Earths and done the first set of work on it. So we are in a slightly different relationship to the supply chain than Japan is.[73]

54. There are international forums where pressure can be applied to nations to remove impediments to free trade, such as the World Trade Organisation (WTO), the G-20 and the Organisation for Economic Co-operation and Development (OECD).[74] Indeed, the Minister stated that "there is currently an investigation of the […] case involving Chinese export quotas [on REEs] there are [also] issues here that could well come up in a WTO context".[75]

55. One problem arising from the monopoly of supplies by a single nation—highlighted by the Government in its written submission—is that "emerging economies are aiming at reserving their resource base for their exclusive use".[76] Dr Jonathan Di John, Lecturer in Political Economy at the School of Oriental and African Studies, considered the REE export quota reduction a part of standard industrialisation policy by China. He explained that many countries use this to fuel their transition to a developed economy:

One of the reasons why, [...] and they might disguise it in the form of environmental concerns and smuggling concerns, is that they would like [...] to force, or at least provide a lot of incentives, for firms to locate in China […] It's a foreign direct investment strategy and an industrial strategy. Every country that is wealthy today has done it in the past [...] this is something that is part of an historical continuity of countries trying to catch up.[77]

56. Charles Emmerson, Senior Fellow at Chatham House, agreed with Dr Di John's analysis:

China is industrialising rapidly and it has a strong domestic demand for many of these minerals. It may be that [...] rather than politics or any broader strategic intent, which is behind conceivable curtailment of supplies to countries such as the UK and, indeed, other advanced economies in the future.[78]

57. However, Dr Hatch pointed out that industrial policy was not the reason given by China for their export restriction: "ostensibly these [quotas] were put in place by the authorities to allow for the shut-down of inefficient, polluting mines and to allow for environmental remediation".[79]

58. We do not, however, ignore or wish to devalue the environmental impact of the mining of strategic metals. Differences in national social and environmental legislation are one of the reasons why there are large differences in the production costs of certain strategic metals.[80] Levelling the global playing field of social and environmental legislation might stimulate competition and prevent national monopolies developing by narrowing the global range of production costs. It was recognised by the Minister that environmental impacts in China were significant and that "mining [REEs] is a nasty, dirty and environmentally risky business and the environmental regulations in China may be less onerous than in many other countries".[81] We will return to the subject of environmental impact in chapter 4.

59. Monopolies and oligopolies in strategic metals distort the market. They can arise because of a variety of reasons, including economic, political, geographic and environmental issues. China's reduction in export quotas of rare earth element raw materials is an example of this and restricts a free market in metals. We invite the Government to set out in its response the outcome of the investigation into Chinese export quotas, as described by the Minister. We consider that, to maximise the benefits of free trade, the Government should ensure that restrictions in the trade of strategic metals are discussed at an international level, through forums such as the WTO, G-20 and the OECD.

Demand for metals

60. Increasing demand causes prices to increase. In its written submission to this inquiry Research Councils UK (RCUK) pointed out that "there is rapidly increasing demand [for metals] from emerging economies such as Brazil, Russia, India and China".[82] The Society for Chemical Industry noted that:

the well established major general increase in the consumption of metals which began in the last century, shows no sign of abating and is likely to be exacerbated by high volume emerging economies.[83]

61. Demand for strategic metals is likely to increase not only from emerging economies but also from emerging technologies. The Government told us:

The UK operates in a global market and largely requires the same materials as other developed economies, and as the world economy moves towards high technology and low carbon manufacturing, competition for strategic metals and resources in general will increase.[84]

62. RCUK quantified some of the increases in demand from new technology projected for several strategic metals:

Demand for gallium in emerging technologies may increase by a factor of more than 20 between 2006 and 2030. For indium, germanium and neodymium, the factors are 8, 8 and 7, respectively, over the same period.[85]

63. The increasing global demand for strategic metals from emerging economies and new technologies will be a significant factor affecting their price, and therefore availability. Assessment of future demand will be essential to assessing the potential scarcity, risk to supply and future price of strategic metals. Assessments of future demand should be part of the shared database we have proposed.

Market responsiveness

64. Anthony Lipmann, of Lipmann Walton & Co Ltd and the MMTA, gave an example of how changes in supply and demand affected the price of rhenium, a metal essential to the manufacture of single crystal turbine blades in jet engines. He said that rhenium "was worth $300 a kilo in 1996" and that in "August 2008 it reached $10,000 a kilo".[86] He explained that despite the increase in price there was still sufficient supply because rhenium was used more efficiently, was recycled and the price stimulated investment in mining activity.[87] Restrictions of supply or increases in demand will cause prices to increase and are likely to stimulate investment into reserves that are competitive at the new price. However, the view of the Geological Society of London was that, while global metals production levels could respond to price, "the long lead time from the instigation of an exploration programme by a company to mine production—typically at least 10 years (with success far from certain)—severely restricts market responsiveness".[88]

65. Dr Pitts, RSC, pointed out that "it takes something between six to fifteen years to either reopen or start up a mine to produce".[89] The ESKTN agreed:

The supply of metallic minerals and global markets tend to respond to the demand [...] however the processes involved in discovering and developing a new deposit or substitute material can take many years so there is a lag in the response to demand which tends to result in shortages and price peaks[90]

66. While the evidence we received showed that there was a time lag between demand and supply and that this would lead to price increases in the short-term, Mr Lipmann was confident that the market would respond: "mining houses, metal merchants and everyone involved in the cycle wants to make money and they will invest in it. They will bring forward metals by their investments".[91]

67. The costs of strategic metals may be only a small fraction of the total costs of making a product and may not be felt by a consumer in the price of end products. For example, despite the price increase in rhenium from $300 a tonne to $10,000 a tonne over 12 years, Mr Lipmann pointed out that Rolls Royce are still making engines.[92] Dr Di John, School of Oriental and African Studies, concurred:

The share of the cost that these metals constitute in terms of the production process is much less than, say, oil was. While there will be a lag, the effects of any dramatic increase in price is likely to be of much less effect in terms of production costs.[93]

68. On the question of companies hedging against supply risks and price increases, Charles Swindon, Chair of the MMTA Trade and Lobby Committee, said that "prudent large manufacturers do plan five years ahead, will pay premiums and will pay the price for what they need".[94]

69. Paying a premium may be an option for large businesses but for an SME this may not be possible. While the Minister stated that he was not aware of any resource issues facing SMEs,[95] the Defra report stated that "the awareness of SMEs has not been gauged" and that "a lack of information could leave them unprepared for resource supply issues, potentially affecting [...] their own profitability"[96] (see paragraph 33).

70. Changes in supply and demand can lead to significant fluctuations in the prices of metals. While this may not be a problem for end users or large companies we are concerned that small and medium enterprises (SMEs) could suffer from unexpected large and rapid price increases. The Government must ensure that mechanisms are in place to reach out to SMEs across the country, a role previously fulfilled by the Regional Development Agencies. We recommend that the Government consult with SMEs using strategic metals to ascertain: (i) their awareness of resource supply issues; (ii) how SMEs may be affected by supply issues; and (iii) what information on resource supply SMEs need to enable them to prepare for changes in the market and maximise profitability.

STOCKPILING

71. We heard that some companies retain stockpiles of strategic metals to alleviate changes in the market.[97] Indeed, the EC report identified stockpiling of metals as one method to mitigate supply restrictions.[98] The US maintains a stockpile of metals, albeit reduced in size in recent years, that are considered critical for defence.[99] Japan currently maintains a stockpile of metals that are important for manufacturing industries.[100] In the past the UK has maintained a stockpile of strategic metals and Dr Chapman, former advisor to the Department for Trade and Industry (DTI), told us:

HM Government formerly had a small stockpile of strategic minerals. It was set up by the DTI in 1983 and its abolition was then announced in November 1984. In fact the last sales were not made until 1996.[101]

72. Stockpiling, possibly at an EU level, was presented to us as a possible option to alleviate metals supply issues but there would be a cost both in terms of purchasing stocks and storing them.[102] Dr Chapman explained that the reason for the reduced size of the US stockpile was due to its high cost.[103] RCUK also drew our attention to the high cost associated with stockpiling.[104] Mr Morley, Director of Sustainable Innovation at the sustainability consultancy, Oakdene Hollins, stated:

stockpiling at an EU level, similar to what occurs in Japan has been proposed, but is generally not preferred in free market economies such as the UK. Also the timescale over which it could operate (typically months rather than years) is not sufficiently long to address some of the speciality metal supply issues.[105]

73. When we questioned Professor Robert Watson, Chief Scientific Advisor to Defra, on the role of Government and stockpiling of resources, he saw:

the Government's role is in helping to provide information. What you are also suggesting is that the larger companies have more the ability not only to bulk purchase but to stockpile. I don't see that there is a role for Government in stockpiling.[106]

74. Stockpiling is an unattractive option because it is expensive but it may be necessary if the market fails because of sustained market manipulation by a monopoly supplier. The Government should keep this policy under review.

Trading metals

SPECULATION IN THE METAL MARKETS

75. A recent communication from the EC, Tackling the Challenges in Commodity Markets and on Raw Materials,[107] set out the concerns that the EC had about the linkages between financial markets and commodity markets. The communication outlined measures, policies and directives that are coming into force. It also described the change in commodity markets over the past decade:

Markets are experiencing the growing impact of finance, with a significant increase in financial investment flows into commodity derivative markets in recent years. Between 2003 and 2008, for example, institutional investors increased their investments in commodities markets from 13 billion euro in 2003 to between 170 and 205 billion euro in 2008 [...] While the debate on the relative importance of the multiple factors influencing commodities prices is still open, it is clear that price movements across different commodity markets have become more closely related and that commodities markets have become more closely linked to financial markets.[108]

76. In the UK some metals are traded on exchanges while others are traded directly between buyer and seller.[109] Mr Swindon, MMTA, explained the consequences of the closer links between financial and commodities markets:

It is well known that hedge funds have moved into all commodities, whether it is gold or energy [...] they have also moved not just into exchange traded instruments, as traded on the London Metal Exchange, but there is evidence that they have moved into more strategic metals, which are only traded between counterparties, including Rare Earths. If it is perceived that the rate of return over the next 10 years is going to be much greater by investing in very small quantities of rare metals, that is a risk.[110]

Ian Hetherington, Director General of the British Metals Recycling Association (BMRA) agreed that one of the reasons for recent price volatility of copper is that hedge funds are buying up "vast quantities".[111]

77. Mr Emmerson, Chatham House, explained that perceptions could drive speculation and that there has been a "flare up in perceptions of scarcity around certain minerals". He added that:

[Perceptions] may drive price but it is dangerous and we have to make clear that transparency, market mechanisms and open international frameworks are the key to building in […] long term "resilience" as opposed to risk management, which is an approach that is often taken in this area.[112]

78. The perception of scarcity of certain minerals and metals may lead to increased speculation and volatility in price and supply. There is a need for accurate and reliable information on scarcity of metals. This concern underlines the recommendation we have made, that the Government should establish and regularly update a shared database to provide such information. We are also concerned by reports of hedge funds buying up significant quantities of strategic metals. We recommend that the Government investigate whether there are increasing levels of speculation in the metals markets and, if there are, their contribution to price volatility and whether markets that allow high levels of speculation, with associated price volatility, are an acceptable way to deliver strategic commodities to end users.

MARKET DOMINANCE

79. We heard that there were large companies dealing metals within the UK and an allegation was made by the MMTA that a company through a subsidiary may be behaving in an anti-competitive manner:

on the London Metal Exchange there are four very large companies that own the very warehouses that people deliver metal into, J.P. Morgan is one of them.They own a company called Henry Bath. They are, therefore, a ring-dealing member of the exchange and they also own the warehouse. That is restrictive. They were also reported, at one point, to have had 50% of the stock of the metal on the London Metal Exchange.[113]

80. We would be concerned if the ownership of metals storage warehouses by a dominant dealer on the London Metals Exchange were to be anti-competitive. We would also be concerned if a dealer who had the resources to own over 50% of stock on the London Metals Exchange impeded the correct functioning of the market.

81. We use this report to bring the alleged activities of large dealers on the London Metals Exchange to the attention of the Office of Fair Trading. We would be concerned if a dealer were undermining the effective functioning of the market and we look for assurance that the market is functioning satisfactorily.

REACH LEGISLATION

82. The market is affected by regulation. Under the European Council Registration, Evaluation, Authorisation and Restriction of Chemical substances (REACH) regulation, an importer or manufacturer of a chemical substance, in quantities over one tonne, may have to register it with the European Chemicals Agency (ECHA).[114] The aim of the REACH regulation is to:

improve the protection of human health and the environment through the better and earlier identification of the intrinsic properties of chemical substances. At the same time, REACH aims to enhance innovation and competitiveness of the EU chemicals industry.[115]

83. The Cobalt Development Institute told us that Government needed to "ensure that regulatory matters, such as REACH, are applied in a proportional and sustainable way."[116] The MMTA elaborated:

In Europe at present, whilst on the one hand the EU are looking to promote strategic raw materials in REACH they are simultaneously creating de facto import tariffs which are destroying the industry for strategic raw materials in Europe. REACH [...] legislation adds bureaucratic costs to every strategically important metal produced or imported into Europe in quantities of over one tonne per year. REACH, unintentionally, has been a highly destructive regulation.[117]

84. Registration of a substance includes submitting a dossier of information on the substance. The "de facto import tariffs", which the MMTA refer to, are registration fees to the ECHA and the cost of putting together the dossier of information required under REACH.[118] The Government stated that the fees for a company to register with the ECHA ranged from €120-€31,000.[119] This registration fee does not include the cost of producing the dossier of information on the substance.

85. Anthony Lipmann, of Lipmann Walton & Co Ltd and the MMTA, explained what his company (an SME importer of various strategic metals) had to register with the ECHA, in compliance with the REACH regulation. To import a metal, his company either had to "spend a lot of money" to join a consortium, or purchase a letter of access (LOA).[120] In the case of titanium, the LOA to import up to 1,000 tonnes cost his company €40,000.[121] Mr Lipmann made the point that his company only needed to import 100 tonnes of titanium but still had to pay €40,000 and that "if you translate that across the 20 elements that I trade, it is untenable".[122] Mr Lipmann considered that the REACH regulation "creates monopolies, which in turn create manipulation, which create high prices".[123]

86. There is a trade off between the social and environmental benefits of the REACH regulation and its impact on free trade through a potential reduction of competition in the metals markets. Mr Swindon, from the MMTA, said that there was a need for information to be more accessible.[124]

87. The Minister's view was:

that the REACH regulations are, on balance, helpful [...] The regulations provide a common framework across a whole range of potentially hazardous materials applied consistently across Europe. We think that it is in the best interests of British industry to have one consistent framework.[125]

88. The Government explained how importers could join together in registering substances with the ECHA:

REACH provides for manufacturers and importers of a substance to join together in Substance Information Exchange Forums in order to share data, avoid duplication of any new testing, and prepare a joint registration. However, in addition manufacturers of some substances have set up consortia to manage the data gathering, although these are not a requirement of REACH. Letters of access to unofficial consortia cannot be policed by REACH although they would, of course, be subject to competition law.[126]

The Government added that "letters of access [...] are a commercial matter between those in the consortia who have had to incur costs in generating the data and those seeking to use the data for their own products/purposes. Such arrangements [...] could be investigated if there was sufficient evidence of anti-competitive practices".[127]

89. It appears that, if a company is not prepared or able to register a substance with the ECHA directly, it should join a Substance Information Exchange Forums, to register a substance. However, the Health and Safety Executive (HSE) publication, REACH—The Basics, explains that importers importing a chemical substance in quantities of less than 1,000 tonnes need not register until 2013.[128]

90. It appears that there may be, amongst some small companies, a misunderstanding of the REACH regulations and that consortia are being used to register metals when this may not be required. We recommend that the Government reassess the information and advice available to small companies about REACH regulations, in particular information about the most cost-effective means of registering strategic metals. We also recommend that the Government examine whether these regulations have become an unnecessary expensive burden inhibiting the market in strategically important metals.

47 Oakdene Hollins, Resource Efficiency KTN, Material Security: Ensuring Resource Availability for the UK Economy, March 2008, p 20 Back

48 Ev w18, para A2.3 Back

49 Ev w2, para 1.5 Back

50 Ev 52, para 6 Back

51 "Earth's Natural Wealth: An Audit", New Scientist, 23 May 2007 Back

52 Ev 58, para 8 Back

53 Ev w28 Back

54 Qq 71-72 Back

55 Ev 46, para 2 [Environmental Sustainability Knowledge Transfer Network] Back

56 Ev w4, para 6 Back

57 Q 21 [Dr Pitts] Back

58 Ev 58, para 10 Back