De-risking Critical Mineral Supply Chains: The Role of Latin America

Commentary by Christopher Hernandez-Roy, Henry Ziemer, andNathaniel Laske

Published April 11, 2024

Building Resiliency and De-risking

In response to rising concerns over China's dominance of critical links in global supply chains, a new term has come into vogue: "de-risking." First coined by European Commission president Ursula von der Leyen in 2023 and seen as an effort to soften the prior U.S. position of "decoupling" from China, de-risking has gained a host of adherents who see the policy as offering practical guidance for countries and companies to minimize their exposure to Beijing's economic coercion.

De-risking is especially important in the realm of critical minerals and metals. Demand for minerals, especially those involved in the energy transition, is only set to rise. Despite price fluctuations of certain metals, the overall investment outlook for minerals critical to the energy transition remains strong: the total market size for energy transition minerals doubled between 2018 and 2023. The Western Hemisphere, with its impressive mineral reserves, is poised to play a key role in any effort to de-risk mineral supply chains. Done correctly, this would not only help the United States to reduce its own exposure to potential disruptions brought on by great power competition, but also pay dividends for mineral-producing countries by allowing them to climb higher in the value chain and limit their own dependency on a single export destination for much of their economic activity.

According to one estimate, to reach net-zero targets by 2040, 1 million metric tons of copper must be added each year-equivalent to annual copper production from Chile's Escondida mine, the world's largest copper mine, which is responsible for nearly 10 percent of global output. But while increasing production is an important goal in its own right, ensuring that production makes its way into the hands of refiners and end users is equally crucial. It is at this latter stage that much of the minerals projected to grow the most over the coming decades risk being funneled to China under Beijing's strategy of economic coercion.

While the United States has enjoyed success crafting a strategy to de-risk certain critical industries such as semiconductor manufacturing with the CHIPS and Science Act, a similar de-risking strategy has not been adopted by Latin American and Caribbean (LAC) countries, who still rely on China as the primary buyer of their raw materials. To effectively build resiliency into this foundational sector, the United States must be willing to put forward a resource-backed strategy to show Latin America the benefits, and better elucidate the harms, of overreliance on China in the minerals sector. A key component of this approach must be an effort by the United States to step up mining and refining activity domestically and signal its willingness to push de-risking forward at home as well as abroad.

Why De-risking Matters for LAC

While Latin American countries mine a substantial share of the world's strategic mineral commodities, most of the strategic and value-added processing, refining, and downstream manufacturing operations are undertaken far afield from the region. The high geographic concentration of mineral-processing facilities in China make it the dominant producer of refined mineral components; it is the top export destination for Brazilian, Chilean, Panamanian, and Peruvian minerals. China consumed over 65 percent of Chilean mineral exports in 2021, valued at $22.5 billion, or about 6 percent of Chile's GDP. To minimize potential supply chain disruptions and increase resilience, the United States and allies should craft policies that mobilize the private sector to develop value chains within the hemisphere.

Before being incorporated into finished products and after minerals are extracted from the ground, the first step of de-risking the mineral value chain is in processing, refining, and separation. Developing such mineral value chains within the hemisphere will entail policies that facilitate investment toward the vitalization of novel and dormant industries. Chile, for instance, constructed its last copper smelter in 1990, and more than half of the country's production is shipped abroad in a semi-processed form, mostly to China. While the government has plans to upgrade existing smelters and build new, cleaner plants in partnership with the private sector, considerable Chinese investment and financing for the project still pose risks to supply chain resiliency since contracts are likely to benefit Chinese firms interested in securing copper supplies rather than American ones.

China also dominates the aluminum value chain, refining nearly 10 times as much aluminum as the runner-up, India. Yet, South America was once a major exporter of aluminum to world markets. Venezuela, once a significant aluminum producer, currently outputs 20 times less aluminum than it produced in 2011 due to chronic mismanagement and a lack of stable power supply, which caused its state-owned firm to suspend production in 2019. Over the last decade, smelting facilities in Brazil closed due to competition from Chinese and Middle Eastern aluminum firms. However, after the country's Alumar smelter, jointly owned by South32 and Alcoa, reactivated in 2023 after being idle for seven years, the country's aluminum production has reached levels not seen since 2014. Fostering continued investment into the processing of aluminum and other metals across the Americas is essential to fortifying the resilience of supply chains vital to industrial and national security.

In the wake of China's export ban on the technology used to manufacture permanent magnets from rare-earth elements (REE), U.S. and Canadian firms have benefited from grants designed to boost REE processing within the hemisphere, especially given the region's vast untapped reserves and the fact that production of permanent magnets offers the most value added of any activity associated with REEs. Given the capital intensity and complex technical skills required for REE processing, only a few LAC countries could possibly take similar steps to develop their own capacities. The development of truly resilient cross-hemisphere mineral value chains will require sustained public and private investment in the research, technology, and infrastructure necessary to create a value-added ecosystem.

China today is seeking to replace its long-standing strategy of importing raw commodities from LAC countries and exporting back finished products with a more appealing offer of verticalized, in-region supply chains. In 2024, Chinese automaker BYD announced plans to comprehensively integrate its electric vehicle supply chain in Brazil, including processing, battery production, and automotive manufacturing. Such offers are appealing on paper, but in practice these investments run the risk of allowing one single foreign country to control virtually the entire value chain, leaving LAC countries still dependent on Chinese-owned mining, refining, and manufacturing companies to extract, process, and package their own natural resources.

At every step of the mineral supply chain, China's outsized role represents an economic risk and in many cases an impediment to these countries climbing to higher rungs of the value chain. De-risking supply chains is therefore not merely a means of improving U.S. access to critical minerals; it harbors substantial opportunities for countries throughout the hemisphere. Achieving these goals, however, will not be easy.

Challenges to De-risking

As leaders recognize the strategic significance of their mineral resources and take steps to secure their positions within future value chains, one of the signal challenges will be ensuring that resource nationalism, export restrictions, and industrial policy initiatives do not result in market distortions, inefficient trade barriers, and costly protectionism. These measures themselves pose risks to supply chain resilience by disincentivizing private capital flows-stifling development of new mining projects and solidifying dependence on a handful of source countries.

Mobilizing greater private sector investment within mineral supply chains requires a comprehensive mineral supply chain resilience strategy between policymakers, government agencies, academia, public stakeholders, and investors. Experts point to the need for more decisive action from the government in order to guarantee legal and financial security to the market. This helps explain the underdevelopment of Brazil's REE sector, which hosts nearly 20 percent of global reserves but accounts for only 0.2 percent of global production. Experts also point to the need for greater mobilization of the academic sectors, particularly in the areas of chemistry, physics, geology, and mining engineering to meet the labor demands that will come from surging interest in mining. Moreover, less than 50 percent of Brazil has been geologically mapped, and regulatory gaps between local mining laws and more demanding international industry standards create challenges for prospective investors.

Stakeholders must also account for environmental, social, and governance (ESG) practices and labor considerations. Worldwide, half of existing and planned critical minerals mines sit on or near Indigenous or small-farmer land-a proportion that is even higher in LAC, at about 73 percent. As a result, it is imperative that mining companies take adequate steps to reduce ESG-related risk exposure to maintain their social license to operate. Strategic efforts need to be forward looking; the public and private sector must work now to identify new ways to safely store or repurpose mining waste to avoid repeats of the 2015 Mariana or 2018 Brumadinho dam disasters. Investment is also needed in emerging cost-effective and sustainable recycling industries in the Americas for batteries, wind turbines, and other mineral-intensive technologies.

How Can the United States Encourage De-risking in LAC?

As Under Secretary of State for Economic Growth, Energy, and the Environment Jose W. Fernandez has stressed, the United States should work to involve Argentina, Brazil, Chile, and Peru in multilateral mineral-focused fora such as the Minerals Security Partnership (MSP). China is already the largest mining investor in Peru, and state-run firms have already signed billion-dollar deals to develop Argentina's and Bolivia's lithium sectors. Since the MSP was inaugurated, no developing country has joined except for India, an omission given the sheer scale and strategic significance of the minerals the LAC region contributes to the global economy. It is imperative that the United States does more to court the favor of LAC membership in mineral security agreements.

Whether or not countries are willing to commit to joining multilateral frameworks such as the MSP, the United States can work bilaterally with strategic commodity-producing countries to bolster investment flows. The United States currently benefits from close economic relations with LAC's major mining countries, having signed free trade agreements with Chile, Colombia, and Peru. While only small amounts of critical minerals mined in these countries are currently being sent directly to the United States, these countries stand to gain from provisions in the Inflation Reduction Act since they are eligible by extension for subsidies and tax credits offered to U.S. companies.

Further expansion of regulatory collaboration between the United States and allies with similar interests in secure mineral supply chains could bolster competitive economic conditions and weaken the dominance currently exerted by China over mineral markets. For example, the U.S.-Chile tax treaty, which came into effect in December 2023, was only the second tax treaty signed between the United States and a South American country. According to the Department of State, the legislation "will reduce tax-related barriers to cross-border investment between the United States and Chile, facilitating stronger bilateral business ties." The United States could work to facilitate the ease of trade through similar legislation with additional states in LAC.

Through the U.S. International Development Finance Corporation (DFC), the United States should also make greater efforts to increase its equity investments in critical mining companies in LAC, along the lines of the investment it made in TechMet Limited to develop a critical mineral mine in Piauí, Brazil. The DFC has just opened its first-ever regional office for Latin America, which will allow it to expand its footprint in the region.

Looking north, the U.S.-Canada Joint Action Plan on Critical Minerals Collaboration can also serve as a model for U.S. cooperation with LAC. For instance, the two countries have undertaken joint economic analysis to map supply chains for critical minerals in an effort to set priorities and identify potential vulnerabilities; this could be replicated with other key partners elsewhere in the hemisphere.

Leading by Example

The United States will face challenges to promoting greater exploration and mining investment within the hemisphere so long as it is perceived as being unwilling to invest in domestic minerals production. Especially at a time of rising social polarization around mining within the region, the lengthy permitting times and byzantine regulatory dynamics in the United States further reinforce the criticism that Washington would rather export the environmental and social externalities and reap the benefits.

Several initiatives to boost domestic mineral production, processing, and research at home have already been undertaken. The Department of Energy allocated $75 million toward the construction of a Critical Material Supply Chain Research Facility, the Department of the Interior provides grants for critical mineral workforce development, and the U.S. Geological Survey has been tasked with carrying out the Earth Mapping Resources Initiative to better understand the resource potential of domestic deposits. The Department of Defense has provided hundreds of millions of dollars in grants to mining and processing projects of strategic importance, such as its $35 million contract to MP Materials to boost U.S. REE production or its more recent $258 million contract with Lynas-the world's largest producer of REEs outside of China-to develop an REE separation facility in Texas, expected to be operational in 2026.

However, increased processing alone is not sufficient. Permitting and regulatory reform is needed to attract mining investment to the United States. Average wait times between initial project exploration to first mineral output in the United States range from 7 to 10 years, far exceeding the two-year average for similar projects in Australia and Canada despite similarly stringent environmental standards. Following the example of Brazil's Caldeira REE project, which was placed on an expedited "'exclusive' list of 'high-priority' mining projects for the state" allowing for more streamlined approval procedures, the United States could enact a similar policy to prioritize high-value mining projects with the greatest potential to bolster mineral supply chain resilience.

Such momentary expeditions should, however, be paired with a broader effort to overhaul U.S. mining regulations. The General Mining Act of 1872, which still guides mining on federal land, incentivizes speculators to hold on to parcels of land without notifying nearby communities, an approach which does not serve U.S. environmental, social, or national security interests. Indeed, this approach, combined with the tangled web of regulations that govern mine permitting, often means new mining projects quickly become ensnared by drawn-out litigation, one of the primary reasons the United States has moved at such a sluggish pace to open new mines. A new regulatory framework could encourage direct consultations between mining companies and affected communities, as well as the adoption of practical measures to mitigate environmental externalities caused by mineral extraction. These are not alien concepts, they are best practices that have already been implemented by mining companies from Canada to Peru. Increasing domestic mineral exploration and production will not only increase supply directly but also signal to allies in the Western Hemisphere and beyond that the United States is willing to practice what it preaches on mining.

The race to secure critical mineral supply chains as the global energy transition accelerates stands out as one of the single greatest challenges of the coming decades. It is also an unprecedented opportunity for the Western Hemisphere as a whole, but properly seizing upon this will require sustained engagement, investment, and leadership on the part of the United States.

Christopher Hernandez-Roy is deputy director and senior fellow with the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Henry Ziemer is a research associate with the Americas Program at CSIS. Nathaniel Laske is an intern with the Americas Program at CSIS.

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