General analysis of the critical materials sector based on the results of the Conference “Strategic Resources of Ukraine: Scenarios for the Development of the Subsoil Use Industry”, held as part of the implementation of the Economic Growth Strategy of Ukraine until 2040, developed by Boston Consulting Group in cooperation with the analytical center “We Build Ukraine”
The goal of the think tank “We Build Ukraine” in the short and medium term is to prepare a number of solutions for creating policies in the field of critical raw materials, as well as to prepare a roadmap for overcoming existing investment barriers.
Introduction
The metals and mining industry is vital to Ukraine's economy, accounting for 6.1% of GDP and 30% of exports (as of 2021). Ukraine's competitive advantage has traditionally stemmed from large, competitive reserves, a low-cost structure, and established capacities in several key sectors.
Currently, the sector is facing asset loss or damage and reduced capacity utilization due to disruptions in fuel and electricity supplies, transportation infrastructure, and a lack of skilled labor. Ferrous metals mining, primarily in the Kryvyi Rih basin, is largely under Ukrainian control, and non-ferrous materials, including precious metals and rare earth elements, play an important role in the sector's growth. As a result of the invasion, the export focus has shifted to ores, leading to lower profitability and infrastructure problems*.
* According to the analytical data of the BCG
Global challenges
Reliable and unimpeded access to raw materials is a growing concern around the world. There are three key factors that determine the role of critical raw materials in the global economy
critical raw materials are directly linked to industry
technological development and quality of life depend on access to an increasing number of critical raw materials (for example, a smartphone can contain up to 50 different types of metals, all of which contribute to its small size, light weight, and functionality)
Critical raw materials are closely linked to renewable and clean energy sources, as they are indispensable in solar cells, wind turbines, electric vehicles, and energy-efficient lighting
While there are many projects at various stages of development, there are many risks that could increase the likelihood of market constraints and greater price volatility. In particular:
High geographic concentration of production
Long project development timeframes
Decreasing quality of resources
Increased focus on environmental and social performance
High exposure to climate risks
Investment barriers and ways to overcome them at the national level
As of today, Ukraine's investment attractiveness is hampered by a number of barriers and risks that arise at different stages of mining project implementation.
1. State policy:
Lack of state policy in the field of critical raw materials;
Lack of regular updating of specific lists of critical and strategic raw materials and the methodology for classifying minerals in such lists
2. Institutional capacity:
Secrecy of certain information on critical raw materials;
Geological information: scattered across the territory of Ukraine, irrelevance of geological data on critical raw materials, insufficient quality of geological data on critical raw materials;
Balance sheet reserves of mineral deposits are not estimated according to recognized international standards in accordance with the Classification System of the Committee on International Standards for Reporting of Mineral Reserves “CRIRSCO”;
Lack of opportunities for businesses to nominate critical raw material sites for PSA tenders and auctions;
Complicated and lengthy procedure for obtaining land plots for subsoil use;
Absence of the institution of land reservation;
High cost and duration of the procedure for connecting to the power grid;
Existence of “dormant” special permits for subsoil use;
3. State support:
Lack of instruments to stimulate the industry, fiscal incentives, credit incentives, state guarantees, export support, conditions for the development of R&D centers;
Lack of war risk insurance and credit and insurance support for mineral exports;
Selective export control of some critical raw materials.
Conclusions
Despite the above prerequisites and shortcomings, Ukraine is potentially attractive from the point of view of investing in the extraction, processing and supply of critical raw materials to international markets. Ukraine lacks a strategic vision for the development of new economic sectors. Therefore, Ukraine should identify possible economic clusters where we can make greater use of critical raw materials.
The systematic development of the critical materials industry can contribute to strengthening the country's independence, defense capabilities, economic growth, and the development of a green economy with the involvement of international investors. Ukraine should take advantage of this opportunity, as it has significant raw material potential.