The European Union’s ambition to decarbonize at an accelerated pace has the bloc well-situated as a leader in the green transition.1 A steady and secure supply of Critical Raw Materials (CRMs) will be essential for the EU to meet its goals. But limited CRM supply, rising global demand, and geopolitical uncertainty, along with the EU’s dependence on single-country sources, presents a challenge. In Latin America, the EU has a potential partner that is mineral-rich, keen to make use of its resources, and looking to diversify its trading partners. Compared to Asia and Africa, closer pre-existing trade ties with the EU and a more developed mining sector make Latin America a logical priority. Deepening ties would provide a path to diversifying the EU’s CRM supply chain and support Latin American economies, both of which carry wide-ranging investment implications that influence our portfolio positioning over the medium to long term.
The EU’s Decarbonization Ambitions
The EU’s Recovery and Resilience Facility (RRF) and the climate law ”Fit for 55” encourage and mandate significant investments in green technologies. For example, the Netherlands is the EU’s largest producer of natural gas but has been cutting production over the past decade and is now using funds from the RRF to make large investments in offshore wind energy. Under Fit for 55, the EU has effectively banned the sale of combustion engine vehicles from 2035, requiring all new cars sold to emit no CO2.
Figure 1 shows that to make these kinds of structural changes, the EU’s manufacturing sector will need to source substantially more CRMs. Offshore wind requires far more copper, chromium, nickel, manganese, molybdenum, zinc, and rare earths than those required in natural gas production. The cars of the future will require more copper and manganese, as well as lithium, nickel, cobalt, and graphite.
Minerals Used in Clean Technologies Compared to Conventional Technologies (left panel: tonnes/MW; right panel: kg/vehicle)
IEA, May 5, 2021. Steel and aluminium not included. The values for vehicles are for the entire vehicle including batteries, motors and glider. The intensities for an electric car are based on a 75 kWh NMC (nickel manganese cobalt) 622 cathode and graphite-based anode. The values for offshore wind are based on the direct-drive permanent magnet synchronous generator system (including array cables) and the doubly-fed induction generator system respectively. The values for natural gas are based on ultra-supercritical plants and combined-cycle gas turbines. Actual consumption can vary by project depending on technology choice, project size and installation environment.
The EU’s current supply of CRMs is highly concentrated. Figure 2 shows that 80% or more of the EU’s beryllium, lithium, niobium, magnesium, and rare earths (HREEs, LREEs) likely come from a single third country. But post-pandemic supply-chain disruptions, as well as renewed geopolitical tensions with two of its largest trading partners in Russia and China, reinforce the need for resilient, diversified supply chains that can provide a steady flow of raw materials. Policymakers themselves refer to a need to “reduce critical dependencies” and “diversify where appropriate.”2
Countries Accounting for Largest Share of EU Sources of CRMs (%)
European Commission, March 2023. *Share of global production.
With this in mind, the EU recently unveiled its Critical Raw Materials Act, which limits the sourcing of each strategic material from a single third country by 2030.3 As shown above, that is a big ask, and international engagement is vital. Another key element, which has also been discussed at the G7, is an explicit initiative to create a “CRM Club” of like-minded countries keen to strengthen CRM supply chains. And a commitment to joint procurement at the EU-level is an attempt to claw back bargaining power from producing countries.
CRMs in Latin America
Of the critical minerals needed, Latin America is likely best suited to provide copper, lithium, graphite, and zinc. It does not produce cobalt, and it produces mostly class 2 nickel, which is less useful for technologies used in decarbonization activities.
Copper is a key metal needed in several applications and copper market participants generally expect a significant shortfall in supply relative to demand beginning in a few years, with the expected supply of copper estimated to be only 80% of demand by 2030.4 Chile, Peru, and Mexico are particularly well positioned to benefit from this dynamic. The three countries together accounted for over 40% of global copper production in 2022 and have 36.5% of the world’s estimated copper reserves. However, output growth in those countries has stalled in recent years (Figure 3).
Latin American Copper Output Has Stalled Despite Large Reserves (metric tonnes)
Macrobond, July 5, 2023.
Latin America also has significant lithium reserves, but a large portion remains undeveloped. The region accounted for almost 37% of global 2022 production and currently accounts for more than 70% of estimated global reserves. Chile and Bolivia have the largest proven reserves (Figure 4), with significant room for expansion in both countries. Argentina, Brazil, and Mexico can also contribute to lithium production growth in the region, but to a lesser extent as their reserves are relatively small by comparison.
Global Lithium Reserve (metric tonnes)
United States Geological Survey, January 2023.
Graphite is present in both Brazil and Mexico, with Brazil having over 850 years of reserves at current production rates. The two countries represent only 6.7% of 2022 graphite production, but over 23% of global graphite reserves (mainly in Brazil).
Zinc, which has applications in wind power, can also be sourced in a few Latin American countries. Bolivia, Mexico, and Peru provided almost 21% of the world’s zinc in 2022 and have at least 14% of global zinc reserves.
A Value-Add Partner
Clearly Latin America can help the EU satisfy some of its CRM needs. That said, the EU will be competing with other large economic powers such as the U.S., China, Japan, and Korea. Paying more than another buyer is of course persuasive, but there are other ways in which the EU can compete for these minerals
As Latin America seeks to move away from its “dig and ship” model of raw material production in favour of more value-added processes, the EU could help to develop the region’s processing capabilities. The EU could also offer technical, regulatory, environmental, and educational assistance, which would allow Latin America to advance its collective economy. The EU could also assist in the development of a recycling industry in Latin America as its economies advance.
In many cases, social, political, and regulatory tensions have been holding back investment. With much of Latin America shifting toward populism and the development of new projects facing resistance from local communities, the EU could assist with environmental education and work with local regulators and mining companies to build credibility. This could facilitate faster mine development and, in turn, increased production of critical minerals.
Another issue facing Latin American mining companies is the high tax rates placed on them by local governments.5 To offset this, the EU might offer low-cost financing to these governments to improve regulatory and environmental oversight, as well as fund much needed infrastructure such as hospitals, schools, and roads.
Models of Engagement
Of the 21 countries in Latin America, the EU has a trade agreement either in place or in the pipeline with 18 of them. But new deals or wide-ranging updates to existing ones can take decades. Instead, other models of engagement, such as Memorandums of Agreement (MoUs), or specific CRM amendments to existing agreements, may present a better opportunity.
For example, the EU recently signed an MoU with Argentina on the development of sustainable raw material value chains. And a recent update of the EU-Chile trade deal has a dedicated chapter on CRMs, which amongst other things, allows EU companies to apply for exploration licences in Chile without discrimination, and commits to carrying out environmental impact assessments.
As the transition to green technologies gathers momentum, CRMs are increasingly in high demand. However, supply is not expected to keep pace with burgeoning demand in the coming decade. This has wide-ranging implications for EU and Latin American economies alike. Closer regulatory alignment to the EU, the chance to move up the mining supply chain, and the potential benefits to GDP growth and currencies from a stronger current account could support long positioning in sovereign debt of certain Latin American countries, such as Chile and Peru. On the EU side, further ties with Latin America could help diversify supply chains away from China and provide an additional source of minerals critical to meeting its decarbonization goals.
For certain metals, prices are likely to increase to unprecedented levels. This positive price action is necessary to bring out new supply as Latin American mining companies can develop CRM reserves more economically. Similarly, investments in the bonds of companies that produce these commodities could generate strong returns in the years to come. Ultimately, increased supply should alleviate pressure on these commodity prices, allowing for a more financially feasible global decarbonization plan.
Special thanks to Francisco Campos-Ortiz and Katharine Neiss for their contributions on this piece.
1 IMF, “How to Meet the European Union’s Ambitious Climate Mitigation Goals,” September 24, 2020.
3 European Commission, “Critical Raw Materials: Ensuring Secure and Sustainable Supply Chains for EU’s Green and Digital Future,” March 16, 2023.
4 IEA, “The Role of Critical Minerals in Clean Energy Transitions,” 2021.
5 S&P Global Market Intelligence, “Miners Ready to Cut Investment if Chile Raises Copper Tax,” August 18, 2022.