BUSINESS LAW & TAX Africa and critical minerals

Richard

Martin 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 revenues reaching $400bn a year, 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 the world’ s top producer of many critical minerals, Africa has a special role in powering the global energy transition, with its critical mineral store expected to provide many opportunities for the continent in the next few years Among other things, 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, lithium and rare-earth metals

Increasing interest from the major players in Africa’ s raw materials is evident in recent policy announcements from the EU and the US Both have emphasised the need to mitigate commodity supply chain risks and develop strategic agreements with countries able to 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 gases, to “level the playing field” with domestically produced products that must pay the EU emissions trading system charge

Negotiating

The intention is to prevent the dilution 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 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

The EU also recently announced that 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

Similarly, the US signed the Inflation Reduction Act (IRA) into law in August 2022

The law permits subsidies for electric vehicles only if 40% of their critical minerals were mined or processed in the US or in 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 of which are

Taxing Matters

abundant in Africa

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

The African Continental Free Trade Area, implemented in 2021, has 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, investmentfriendly 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 is firmly on how the global demand for critical minerals can be translated into sustainable growth of its mineral mining operations and production facilities, and how it can be ensured this growth will benefit the 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 much-needed access to clean power

Consideration also needs to be given to the development and 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