Supply Chain in Mining: The Race for Critical Raw Materials

Sigma Lithium’s Grota do Cirilo mine in Brazil
Vinson & Elkins LLP Examines Two Recent Acts That It Believes Are Decisive Steps Towards the Securing of Critical Raw Materials Supply Chains

Louise Woods and Elena Guillet, respectively Partner and Associate, at international law firm Vinson & Elkins, examine two recent Acts that, in their expert opinion, are decisive steps towards the securing of critical raw materials supply chains.

Vinson & Elkins LLP is an international law firm which practises in numerous legal fields, particularly those that pertain to the energy industry, with more than 400 of its 700 lawyers involved in energy-related legal work.

On 16 August 2022, the USA signed into law the Inflation Reduction Act (IRA), which sets out the US’s commitment to increasing its domestic supply of critical minerals. The IRA has three main purposes: to secure the energy transition; to encourage domestic manufacturing; and to improve US energy security.

On 13 November 2023, the European Council and the European Parliament reached a provisional deal on the Critical Raw Materials Act (CRMA). The CRMA aims to ensure the EU’s access to a secure and sustainable supply of critical raw materials.

The IRA and CRMA are the clearest results of a race to reclaim control over critical raw materials following the global supply chain vulnerabilities exposed during the pandemic and exacerbated by Russia’s invasion of Ukraine, as well as a growing frustration over China’s dominance of the global critical raw materials chain. America and the EU recognise that critical raw materials are the cornerstone for the electrification of society. This article explores the IRA’s and CRMA’s potential impacts and opportunities for the mining industry.

What will be the impact on the mining industry?

The IRA names 50 “applicable critical minerals” for the energy transition, which include cobalt, lithium, aluminium, tin, nickel, graphite and chromium. The IRA’s two main tools relevant to the mining industry are the advanced manufacturing production credit and the clean vehicle tax credits. The mining companies excavating the applicable critical minerals will be able to seek a production credit equal to 10% of production costs. The extracted minerals need to meet defined purity thresholds to qualify for the credit. The clean vehicle tax credit provides indirect incentives to US mining companies, as new clean vehicles meeting requirements for critical minerals and battery components will benefit from the credit. Specific percentages of the value of the minerals contained in the battery must be extracted, processed or recycled in the United States. or in any country with which it has a free trade agreement. Despite the clear successes of the IRA in generating a surge in domestic critical mineral investments from miners and car manufacturers, the US’s outdated extraction and processing laws and permitting delays require reform to adequately support the IRA’s aims.

The CRMA names 34 critical raw materials and 17 strategic raw materials. The agreement sets benchmarks for domestic extraction (10%), processing (40%) and recycling (25%). These benchmarks will put increased pressure on the mining and processing industry to ramp up their domestic production capabilities and revisit their supply chains. The CRMA also aims to streamline the permitting procedure for critical raw materials projects. It unifies the timings of the permit procedure, limiting the total duration of the permit granting process to 27 months for extraction projects and 15 months for processing and recycling projects. Notably, the CRMA excludes the environmental impact assessment (EIA) from the timeline, but not the public consultation steps for the EIA.

It is this streamlined process that has the potential to backfire. The designated authority for the permitting of projects under the CRMA may either rush and refuse projects to comply with the timeline, or it may grant permits rushing important stepping stones such as the public consultation, leaving projects with the risk of having failed to secure a ‘social licence’. Finally, the CRMA identifies measures to diversify imports of critical raw materials ensuring that not more than 65% of the EU’s consumption of each strategic raw material comes from a single third country.

The IRA and CRMA will generate investment opportunities for domestic projects related to raw materials extraction, processing and recycling. However, investors will need to navigate the potential market volatility and manage risks associated with regulatory compliance and sustainability considerations. Clarity on supply chain transparency and reporting requirements will be particularly challenging for the complex and relatively opaque supply chains in the raw materials sector.

What about the prospect of deep sea mining?

The IRA leaves open the possibility of critical raw materials extracted from polymetallic nodules from international waters entering the US supply chain and qualifying for the clean vehicle tax credits. Interestingly, the 1994 Agreement Relating to the implementation of Part XI of UNCLOS (the section regulating international waters) restricts UNCLOS member states from providing preferential access to markets for deep-sea minerals. The US, not having ratified UNCLOS, is not bound by such restrictions, and once deep sea mining is fully operational, could directly incentivise critical raw materials extracted from international waters.

Similarly, the CRMA does not exclude deep sea mining from its scope. The definition of extractive activities “means the primary or secondary extraction of ores, minerals and plant products from their original source as a main product or as a by-product, including from a mineral occurrence underground, mineral occurrence under and from water, sea brine and trees.

In conclusion, the IRA and CRMA are decisive steps towards the securing of critical raw materials supply chains. Notwithstanding, there is no denying that deep sea mining presents the unique opportunity to act on policy proposals to accelerate the diversification of the supply and processing of critical minerals, breaking China’s stronghold on supplies and the strains resulting from the geographical monopoly of some critical raw materials.

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