By Tom Vulcan
In mid-June this year, a report titled "Critical raw materials for the EU" was submitted to the European Commission. Produced by the ad hoc working group of the Raw Materials Supply Group, the report concluded that 14 raw materials can now be considered "critical," meaning their availability has come increasingly under pressure.
All but two (fluorspar and graphite) are metals:
- Rare earths
However, it's important to note that the list of rare or strategic metals with tight supplies encompasses many more than just these 12 metals. For instance, there are the platinum group metals (PGMs), which include iridium, osmium, palladium, platinum, rhodium and ruthenium. And the appropriately named "Rare Earth Metals" includes not only the 15 lanthanides, but also scandium and yttrium.
Critical Raw Materials at the EU Level
(Click to enlarge)
Over the last several years, Hard Assets Investor has looked at most of these critical materials in some detail.
Critical Materials and the US
While the European Commission took some 18 months to produce its report (after first proposing its "...new strategy to address EU critical needs for raw materials" back in November 2008), at least it has produced such a report. Unfortunately, the same can't be said for the US.
Toward the end of 2007, the National Academies published a couple of very important papers on the subject. The two papers in question, "Managing Materials for a Twenty-first Century Military" and "Minerals, Critical Minerals, and the US Economy," were both the subjects of "closed-door" congressional briefings following their publication in October of that year. But little of substance addressing the issue of materials' criticality has been seen since then.
Managing Materials for a Twenty-First Century Military
"Managing Materials for a Twenty-First Century Military" gave a thorough examination of the operation of National Defense Stockpile and its efficacy, as undertaken by the Committee on Assessing the Need for a Defense Stockpile of the National Research Council (NRC).
The committee's conclusions can only be described as damning. In the paper's summary:
[t]he committee concluded based on the preponderance of evidence it considered that there is a disconnect between the operation of the current National Defense Stockpile from actual national defense materials needs in the 21st century and from national defense strategies and operational priorities.
And just the first conclusion (of four, with three recommendations) provides pause for thought:
The design, structure, and operation of the National Defense Stockpile render it ineffective in responding to modern needs and threats.
Of the materials examined in the study, beryllium and the rare earths, in particular, stand out.
The NRC's report did elicit some follow-up — probably, not least, because of its, perhaps surprisingly, candid conclusions. For starters, the US Department of Defense (DoD) established a Strategic and Critical Materials Working Group. On the basis of its deliberations, and those of the Defense National Stockpile Center (DNSC), the DNSC "recommended suspending sales for six commodities for which very little inventory remained in the stockpile and limiting sales of seven other stockpile commodities to defense needs."
On August 7, 2008, the DNSC announced that sales of the following 13 materials were suspended or restricted — all of them metals or metal compounds:
- Chromium metal
- Ferrochrome (high carbon and low carbon)
- Tantalum Carbide
- Tungsten metal powder and tungsten ores and concentrate (O and C)
Following various congressional requests and the establishment of the above working group to address both the issues raised in the NRC report and in congressional reports, the "Reconfiguration of the National Defense Stockpile (NDS) Report to Congress" appeared in April 2009.
In addition to suggesting a new approach to stockpiling, essentially transforming the NDS into something called a Strategic Materials Security Program (SMSP), the report notes the importance of "identifying and ensuring, on a continual basis, an adequate supply of strategic and critical materials required for US security needs."
And while the list above may indicate those materials that have been identified as currently being of critical importance, the Institute for Defense Analyses in its report for the DNSC, identified a further 40 "Systematically Analyzed Materials "with"... shortage, near shortage, or problems" — many of them also metals.
Finally, in what appears to have been more in knee-jerk reaction to contemporary press reports than any well-thought-out argument for such a study, the US General Accountability Office (GAO) was required to submit a report on rare earth materials in the defense supply chain to the Committees on Armed Services of the Senate and House of Representatives by April 1, 2010.
This the GAO did, reporting unsurprisingly that, among other things: i) "... current capabilities to process rare earth metals into finished materials are limited mostly to Chinese sources"; ii) "Government and industry officials have identified a wide variety of defense systems and components that are dependent on rare earth materials for functionality..."; and, iii) the "DOD has not yet identified national security risks or taken departmentwide action to address rare earth material dependency..."
Minerals, Critical Minerals, and the US Economy
The second of the two National Academies' papers, "Minerals, Critical Minerals and the US Economy," was undertaken by the Committee on Critical Mineral Impacts on the US Economy and the Committee on Earth Resources of the NRC. Its purpose was to investigate "the importance of nonfuel minerals in modern US society: which minerals might be termed "critical" and why; the extent to which the availability of these minerals is subject to restriction in the short to the long-term; and when considering mineral criticality, which data, information, and research are needed to aid decision makers in taking appropriate steps to mitigate restrictions in the nonfuel mineral supply."
Perhaps the most important goal of the paper — and its greatest achievement — is its examination of the whole issue of criticality, i.e., how to define the term "critical," and which minerals qualify.
Simplifying their reasoning significantly, the authors (with convincing argument) proposed that criticality can be evaluated using a two-dimensional "criticality matrix," with the vertical axis indicative of the "importance of minerals in use" and the horizontal axis indicative of "availability." The criticality of any mineral (or, indeed, material) can be determined by where it falls within this matrix.
The EC report appears to draw significantly on the criticality methodology described in the National Academies' study. However, although the EC report also relies on the concept of a matrix to evaluate a material's criticality, there are a number of differences between their methodologies.
Perhaps the greatest difference between the US report and the EC report, however, is that the former chose to look at criticality for only a small selection of specific minerals, since in its words, "... it did not have the time or resources to evaluate all potentially critical minerals." The latter report not only examined a selection of some 41 minerals and metals to determine their criticality for the EU as a whole, but also made policy and other recommendations, based upon its determinations.
To demonstrate just how circumscribed the US paper's practical application of its methodology was, those minerals whose criticality it examined were restricted to:
- Rare earths
Indeed, the NRC's two criteria for selection were: a) the set had to "... illustrate the range of circumstances that the matrix methodology accommodates and considers; and b) that "...the set of minerals ... would likely be included in a more comprehensive assessment of all potentially critical minerals."
Of course, it can be argued that any attempt to evaluate "all potentially critical minerals" was not within the original report's scope. But that then raises the alarming question as to why no follow-up study has been conducted to actually evaluate which minerals are critical for the US.
From a global perspective, the US appears to be far behind the curve vis a vis critical materials. Not only has the EC stolen a significant lead in identifying critical materials as well as which policy decisions should be made to secure them, they've also assessed the merits of stockpiles of those other countries (that we know of) with them. For example, China, Japan and South Korea have more than likely already identified the materials critical to them, too — both from a defense perspective and a civil perspective. Neither of these is something the US would appear satisfactorily to have done.
Perhaps the US Department of Energy (DoE) made a nod in the right direction this March, when it "announced its intent to develop its first-ever strategic plan for addressing the role of rare earth and other materials in energy technologies and processes." But it is certainly not enough.
As Major-General (retired) Robert H. Latiff, Ph.D., chairman of the National Materials Advisory Board and former chairman of the Committee on Assessing the Need for a Defense Stockpile, i.e., the man responsible for producing "Managing Materials for a Twenty-first Century Military," puts it: "These issues of assuring supplies of critical materials are far too important to the nation for us to allow ourselves the same type of inaction we've demonstrated in the past."
If nothing else, perhaps sooner rather than later, the National Academies should be commissioned to complement their report with a study to evaluate, "all potential critical minerals" from a US perspective.
Opportunities for Investors
Of the materials common to the lists described in the various reports mentioned above — that is, cobalt, gallium, germanium, indium, niobium, the PGMs, the rare earths, tantalum and tungsten — all are metals. Most of them are identified in their pure metallic (as opposed to compound) form.
So for those investors interested in creating portfolios based on exposure to specific strategic metals — whether via the physical metals (with all the usual provisos) or by shares in metals' producers — the information in these reports could provide clues as to their portfolios' possible compositions.
In addition to specific sets of metals identified as critical, in the case of those metals mentioned in the EC report and "Minerals, Critical Minerals, and the US Economy," evaluations of the criticality of individual metals are also provided. And since these evaluations are made de facto from two different geographical perspectives, they also provide investors with an additional informational dimension.
Although Managing Materials for a Twenty-first Century Military, together with the GAO report and the report to Congress on the NDS, do provide indications of the criticality of various metals, as such, these relate only to the US defense sector. However, if you take into account the size of the US in terms of its production, consumption and export of military material, it's probably safe to assume that what is critical to the US defense industry is also critical to other producers, consumers and exporters of military hardware in other countries.
What's more, when the US DoE reports on its initiative, then more information will be available on those materials (specifically metals); in particular, those critical to "green" energy technologies and processes.
However, both "Minerals, Critical Minerals, and the US Economy," and "Critical Raw Minerals for the EU" provide useful information on the economic usage and importance of the materials they examine. Additionally, in its evaluation of criticality, the EC study introduces the concept of "megasectors" to "approximate value-added chains."
In the methodology developed in this study, the economic importance of a raw material is measured by breaking down its main uses and "attributing to each of them the value added of the economic sector that has this raw material as input." In each examination of an individual material (to be found in Annex V to the EC report), there is also an indication of usage by megasectors.
So, as critical materials become increasingly recognized as a crucial line of inquiry, more information should start to flow either from the National Academies or such bodies as the European Commission, the US government and other governments worldwide.
For investors contemplating an investment in critical materials, such as the strategic metals, these reports — and those to come — should form an integral part of their decision-making processes.
But, what cannot be stressed sufficiently are the complexities surrounding the issue of criticality. Not least, there are, as yet, no accepted norms in defining what is and what is not critical. Geography will play a large part in the process, as will politics and unforeseen technological advances.
Finally, it is vitally important to realize that when it comes to defining criticality, nothing is static. The discovery of a substitute for an existing critical material may lead to the rapid redefinition of that material as noncritical, or a new use found for an existing noncritical material may see it quickly redefined as critical. If proof of this is needed, then the briefest of looks at the histories of the strategic metals will more than suffice.
Disclosure: No positions