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14 December 2022

Canada’s Critical Mineral Strategy; the IRA’s upstream little brother

Canada has introduced its own critical mineral strategy alongside $4 billion in funding to support the legislation. This will include at least $1.5 billion to support critical mineral projects, with priority going to advanced manufacturing, processing, and recycling applications.

The strategy has defined 5 key goals for this legislation, firstly to support economic growth and job creation through investment, which with $1.5 billion it could realistically have a significant impact.

The other 4 goals, promoting climate action, advancing reconciliation with indigenous peoples, increasing diversity, and improving global security of supply are all noble goals, but what ultimately matters to the US and Canada is going to be critical mineral supply, which other than potential issues with indigenous populations affecting potential sites are secondary to the legislation’s intentions.

Critical minerals – as the name would suggest – have never been more important, the Biden administration’s Inflation Reduction Act has spurred unprecedented investment into raw material supply ventures across the US and its allies.

The desire from the US to create its own battery and EV manufacturing industries is going to put immense strain on the supply chain for certain raw materials that had otherwise only been produced in significant quantities in Asia for Chinese use. It wouldn’t be an exaggeration to say that the IRA is the primary enabler of this particular piece of Canadian legislation.

Canada has updated what it considers to be “critical minerals” to incorporate those prioritized by some of its partners, now considering 31 minerals to be of significant importance. Of these, 6 are going to be prioritized as a matter of immediate importance for investment purposes, these include lithium, graphite, cobalt, nickel, copper, and rare earth metals. The common theme here being that these minerals are all used within the supply chain for high-density batteries that will be needed for oncoming EV demand.

As Canada’s critical mineral strategy doesn’t hesitate to boast, Canada is the only Western country to house an abundance of cobalt, graphite, lithium, and nickel, and that its significant mineral reserves are waiting for a reason to be dug out of the ground. In 2021, the minerals sector contributed 5% of Canada’s GDP, nominally contributing $125 million to the economy.

North American EV demand is initially going to favor expensive high-density batteries which offer the highest range regardless of price. This is because the US and Canada are colossal, and there are times when people travel comically large distances and don’t like the idea of waiting for a charge. High disposable income within the US and to a lesser degree Canada will enable this despite the increase in costs associated with this battery type.

This is going to be a relatively unique issue globally speaking, Europe and China have shown an acceptance of smaller batteries with more abundant constituent minerals, without mammoth ranges due to the densely concentrated cityscapes that have acted as demand-hubs thus far. The US and Canada’s size is admittedly less conducive to vehicles with limited range, but the supply chain for higher-density NMC batteries adds additional hurdles to production, which Canada will be happy to provide through domestic resource production.

This strategy is doing something similar to the IRA, in that it is quite transparently pretending to be something it isn’t.

In the same way the IRA was not about reducing inflation, but about spurring domestic manufacturing efforts away from China and towards the US. This strategy repeatedly mentions global cooperation for mineral security and environmentalism when the primary goal of this investment is to onshore mineral extraction and refinement for the North American battery industry. How the IRA took end-product EV manufacturing away from China, this aims to move upstream, sourcing and processing using the IRA’s protectionist terminology.

It’s important to remember that this would have never happened if the IRA didn’t have stringent sourcing and refining requirements for battery and EV manufacturing, and that while the US would like to do everything if it could, Canada’s extreme raw material wealth is far better suited to primary mineral extraction and refinement than the US will ever be.

While Canada’s raw material wealth is nothing to sneeze at, it’s supporting industries are still infantile compared to other countries which specialize in mining one or two key materials like Argentina with lithium or Indonesia with Nickel. Canada’s current highest mineral output is potash when looking at market penetration, it’s a key ingredient in fertilizer, which is still important, but is hardly relevant to the main industry Canada wants to grow.

Thankfully, the Canadian government is undergoing a consultation that aims to accelerate permitting for new projects, unfortunately, this doesn’t have an end date. What’s important here is that this can be applied retrospectively, or it could lead to a delay in applications followed by an unmanageable surge that serves to further complicate the process.

Usually when a country is behind in production of a raw material, it would remain at a disadvantage until it was able to meet a similar cost of production at sufficient quantities to be worth trading with, but this isn’t the case here. American battery manufacturers will be begging for whatever minerals they can acquire from home soil that allow them to get closer to IRA subsidies. This gives every mine and refining facility within Canada a competitive advantage relative to foreign rivals.

Without the IRA’s protectionism, Canada would simply be unable to compete with lower cost alternatives in Asia and South America, and to make use of this position, funding and permitting acceleration is necessary to make up ground on potential competitors.