Physical Risks of Critical Minerals Supply Chain Demand Increased by Geopolitical Tensions

The global discourse surrounding critical minerals is increasingly shaped by physical risks rather than just geopolitical tensions. Recent developments highlight this shift, particularly concerning the repercussions of operational challenges on supply. For instance, Codelco, Chile's state-owned mining company, recently halted work on the underground copper project in the El Teniente mine due to a newly identified seismic phenomenon. This suspension could extend for up to two years, adversely affecting Chile’s copper production, which fell to its lowest quarterly output in two decades.

This scenario starkly illustrates the nature of supply insecurity in critical minerals—it's not merely about regulatory frameworks but often stems from tangible, geotechnical issues. Michael Beaumont, an authority in mining risk engineering at FM, emphasizes that brokers should consider the broader impact of losing access to critical assets for an extended period—not just days, but potentially months or years. The financial ramifications on project viability, cash flows, and stakeholder expectations can be profound, and understanding insurability of these risks becomes essential.

Two distinct features characterize the current cycle in the critical minerals market that complicate the risk assessment. First, the shift in who bears the insured risk is notable; various governments are now actively investing equity into these projects. Canada, for example, has committed C$2 billion through its Critical Minerals Sovereign Fund, while the U.S. and Australia plan to allocate a combined US$3.5 billion by 2026 to bolster their critical minerals frameworks. Such sovereign investments alter the financial landscape, influencing disclosure requirements and the consequences of operational failures. Second, as the focus shifts toward midstream development, with targets like the U.K.’s goal for 20% of its mineral need being met through recycling by 2035, the risks become more intricate. These include not just geological risks but also chemical and thermal risks associated with processing facilities.

Beaumont's perspective on geopolitical factors is measured, pointing out that the importance of operational resilience increases with the strategic significance of these materials. Interruptions caused by physical issues can ripple out to impact broader operations and industries. Supporting this, the International Energy Agency's (IEA) findings reveal that a small number of nations dominate the refining capabilities for essential minerals—averaging around 86% market control for key materials like copper and lithium. With the IEA forecasting that China’s impending export controls could jeopardize approximately US$6.5 trillion in downstream production, it’s clear that reliance on a few key facilities can transform a localized disruption into a significant market event.

In exploring historical data of mining losses, Beaumont’s analysis points to fire as the leading cause, accounting for approximately 32% of total gross losses in the mining sector. This data reinforces the critical need for preemptive measures during facility design stages, where decisions regarding transformer placements and separation of high-value assets can have long-term financial implications. Industry studies indicate that only about a quarter of gross losses stem from direct equipment damage, while the majority are linked to business interruptions—underscoring the importance of integrating risk management into the initial planning stages of projects.

Key insurance products are available to address these issues, but they need to be incorporated early in the development phase. Delay in Start-Up (DSU) coverage, also known as Advance Loss of Profits (ALOP), is essential in mitigating financial losses attributed to construction delays. Similarly, contingent business interruption coverage can address losses stemming from incidents at supply chain partners, making it crucial as facilities increasingly rely on interconnected operations.

The insurance market is evolving to address these complexities. The latest Gallagher Global Mining Market Review highlights emerging capacity, broader coverage options, and increased limits despite poor mining loss ratios over recent years. There's a parallel trend noted by Willis in the digital infrastructure space: organizations are often over-insuring data centers but not adequately focusing on building in resilience from the outset. This logic is equally applicable to the refinery sector, where taking advantage of favorable market conditions for insurance purchases requires brokers to actively engage in discussions about recovery strategies.

As the landscape of critical minerals continues to evolve, industry stakeholders must adapt to an environment characterized by both geopolitical pressures and operational challenges. Addressing supply security requires a multifaceted approach that accounts for the implications of extended interruptions while fostering resilience in the supply chain.