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Africa’s critical minerals will power the worlds energy transition

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Africa’s critical minerals are expected to play a major role in the world energy transition. Image credit: Leon Louw for WhyAfrica

Africa’s critical minerals will power the worlds energy transition

Africa has a special role in powering global energy transition, with its critical mineral store expected to provide many opportunities for the continent in the next few years.

By Richard Blunt, Kieran Whyte, Marc Yudaken, Christopher Jones and Matthew Martin, all from law firm Baker McKenzie

Driven by the energy transition, the demand for critical minerals is expected to rise sharply, more than doubling by 2030 and quadrupling by 2050, with annual revenues reaching USD400- billion, according to the International Energy Agency’s World Energy Outlook 2022.

The growth in demand for major clean energy technologies and the need to deliver on the energy transition require huge quantities of critical minerals, for which announced supply capacity will not be adequate.

The market is recognising this, as demonstrated in recent price growth for many critical minerals (such as lithium, nickel and aluminium). This, in turn, has triggered increased investment in mineral exploration and production.

As one of the world’s top producers of many critical minerals, Africa has a special role in powering global energy transition, with its critical mineral store expected to provide many opportunities for the continent in the next few years.

Among others, the continent is a major producer (and home to huge undeveloped resources) of metals including cobalt, copper, bauxite, chromium, high purity iron ore, Platinum Group Metals (PGMs), lithium and Rare Earth Elements (REEs).

Increasing interest from the major players in Africa’s supply of raw materials is evident in recent policy announcements from the European Union and the United States.

The need to mitigate supply chain risk (Africa’s critical minerals will power the worlds energy transition)

Both the EU and the US have emphasised the need to mitigate commodity supply chain risks and develop strategic agreements with countries that are able to supply responsibly sourced critical minerals.

In March 2023, the European Commission proposed its Critical Raw Materials Act, which aims to secure the EU’s access to minerals and metals critical for net-zero technologies, including by strengthening international engagement, and facilitating extraction, processing and recycling.

In addition, the recently agreed Carbon Border Adjustment Mechanism regulation will charge importers of a number of key products from carbon intensive industries (for example steel, iron, cement and fertilisers) based on their embedded greenhouse gasses, in order to ‘level the playing field’ with domestically produced products that must pay the EU Emissions trading system charge.

The intention is to prevent the dilution or offset of EU carbon reduction efforts by increasing emissions outside its borders, through the relocation of production to countries that have less ambitious policies to fight climate change.

The EU also recently announced it was negotiating to source critical minerals from the Democratic Republic of Congo (home to much of the world’s cobalt), and that it intended to do the same with other African countries such as Rwanda, Gambia and Zambia. The EU already has an agreement in place with Namibia in this respect.

The importance of free trade agreements (Africa’s critical minerals will power the worlds energy transition)

Similarly, the United States signed the Inflation Reduction Act (IRA) into law in August 2022. Among other things, the law only permits subsidies for electric vehicles if 40% of their critical minerals were mined or processed in the US, or a country with which the US has a free trade agreement.

Other clean energy technologies such as wind and solar do not need domestically sourced critical minerals to qualify for the subsidies, but the Act includes a 10% bonus credit to incentivise companies to use locally sourced critical minerals in their clean energy components.

The IRA names 50 applicable critical and rare earth minerals for the energy transition, including cobalt, lithium, chromium and neodymium (used in turbine magnets), all abundant in Africa.

Converting demand into sustainable development (Africa’s critical minerals will power the worlds energy transition)

At present, most of Africa’s critical minerals are exported in the form of ores or concentrates. Certain countries in Africa, including Namibia and Zimbabwe have imposed export restrictions on some of their unprocessed critical minerals, such as lithium, noting that they are losing income by exporting the minerals as raw materials, and that they are planning to develop the capacity to process these minerals locally.

The African Continental Free-Trade Area (AfCFTA), implemented in 2021, has also acted as a strong impetus for African governments to address their infrastructure gaps, enhance and streamline supply chains, improve climate policies that fulfil net zero commitments, boost manufacturing capacity and overhaul regulation relating to trade, cross-border initiatives, investment-friendly policies and capital flows.

It is expected that the trade in mineral commodities in Africa will benefit from these reforms, and that (among other factors) this will result in African countries undertaking a more active role in the sustainable processing of metals and minerals, better capitalising on the continent’s vast mineral resource base.

For Africa, the focus now is firmly on how the global demand for critical minerals can be translated into the sustainable growth of its mineral mining operations and production facilities, and how it can be ensured that this growth will benefit the African continent and its people, not just in terms of the demand for critical minerals, but in how the continent can make use of its own resources to ramp up its energy transition and provide the continent with much needed access to clean power.

Consideration also needs to be given to the development and the implementation, in the near future, of new policies in the EU and US dealing with decarbonisation across the full commodity supply chain, which are intended to preserve current off-take markets for commodities in these regions.

The article was written by Richard Blunt, Partner and Co-chair of the Global Energy, Mining, Infrastructure (EMI) and Projects Practice Group, London, Kieran Whyte, Partner and Head of the EMI Sector Group, Johannesburg, Marc Yudaken, Partner, Corporate M&A, Johannesburg, Christopher Jones, Principal, Energy regulatory and Antitrust, Brussels, and Matthew Martin, Foreign Legal Specialist, North America – all Baker McKenzie

Africa’s critical minerals will power the worlds energy transition

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Africa’s critical minerals will power the worlds energy transition

 

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