There’s a longtime international commodity buying and selling marketplace for vital minerals which means that offer of supplies reminiscent of lithium—which is important for the manufacturing of electrical autos (EVs)—might be obtained from quite a lot of sources, from non-producer merchants to direct off-take contracts.  Nonetheless, every provider and contract sort brings totally different dangers and requires totally different mitigation instruments for producers.

Merchants of those minerals could have a safe provide supply by way of a number of counterparties, however is not going to have a time vital end-use for the metals and minerals they provide.  When shopping for from a buying and selling firm, it will be significant for automotive producers to make sure that supply time is “of the essence” and that the vendor has no incentive to delay or default on supply if the value rises between the date of contract and the date of supply. As well as, automotive producers will want to keep away from arbitrage by the provider between totally different provide and supply contracts, which might be to their detriment.

Finally, there is no such thing as a risk-free technique at current for automotive producers to safe their provide of vital minerals

Not too long ago, we’ve got seen the regulatory dangers of sourcing straight from producers in sure jurisdictions: Zimbabwe, the sixth greatest producer of lithium ore, banned exports of the vital steel in March, additional impacting the availability for EV producers.

Moreover, producers should be conscious of the impression of sanctions on provide: many Drive Majeure clauses (or equal) might be invoked the place a celebration to a contract is the topic of sanctions, which means that efficiency might be suspended or averted completely, with out penalty on both get together. However while which means the client can keep away from sanctions breaches, it doesn’t help with guaranteeing safety of provide.

Pending the funding vital for Europe and different nations to develop native mining and extraction initiatives, vital minerals are sometimes sourced from rising markets. Funding by producers themselves in a mine or venture is changing into more and more well-liked, nevertheless there are authorized dangers related to contracts which are sometimes topic to native regulation and the jurisdiction of the native courts.

In excessive situations, the contract might be seen as merely the start line for the negotiation the place both the venture requires additional funding than initially thought, or the place a competing purchaser provides to offtake the commodity—on this situation, lithium—for the next value.  A purchaser who has already invested probably important sums can face sensible and authorized difficulties in imposing their rights to the commodity as it’s mined or extracted, rights which even when they’re enforceable, can take years (and contain giant authorized prices) to grasp.

Investing in native rising markets additionally comes with reputational dangers. While there’s a international deal with ESG, it is important to make sure compliance with the requirements that the client would anticipate, somewhat than counting on native requirements which can put a lot wanted financial funding forward of environmental or well being and security standards.

Finally, there is no such thing as a risk-free technique at current for automotive producers to safe their provide of vital minerals. Nonetheless, understanding each the counterparty and jurisdiction particular points along with the correct contract phrases can go some strategy to mitigating these dangers.

The opinions expressed listed here are these of the creator and don’t essentially mirror the positions of Automotive World Ltd.

Sarah Taylor is Companion at HFW