Stockpiling of Non-energy Raw Materials Final Report prepared for DG Enterprise and Industry RPA March 2012 Stockpiling of Non-energy Raw Materials Final Report March 2012 prepared for Directorate-General Enterprise and Industry by Risk & Policy Analysts Limited Farthing Green House, 1 Beccles Road, Loddon, Norfolk, NR14 6LT, UK Tel: +44 1508 528465 Fax: +44 1508 520758 Email: [email protected] Web: www.rpaltd.co.uk If printed by RPA, this report is published on chlorine free, 100% recycled paper. DISCLAIMER While RPA considers that the information and opinions given in this report are sound, the report is based on assumptions and information that are subject to uncertainties. Due to such uncertainties and because events may not occur as expected, there is a possibility that the results presented in this report will be different from situations which occur in the future. This report has been prepared for the European Commission in accordance with the associated contract and RPA will accept no liability for any loss or damage arising out of the provision of the report (and/or associated data) to third parties. Furthermore, it must be stressed that views expressed in this report which are not otherwise assigned are those of the authors and are not necessarily shared by the European Commission. Risk & Policy Analysts EXECUTIVE SUMMARY Background to the Study and Study Objectives The aims of this study were to collect information on and review past and current experiences with the stockpiling of non-energy non-agricultural raw materials, and to provide a preliminary assessment of the desirability, feasibility and added value of possible EU action in this field. The term ‘stockpiling’ can either refer to stock accumulation for security/defence reasons (termed ‘strategic stockpiling’), or to prevent disruption of the national economy from emergencies such as raw material shortages (‘economic stockpiling’). While this study draws on international experience of both types of stockpiling, the focus is on examining the added value and feasibility of a possible economic stockpiling programme of raw materials. This analysis is complemented by a review of experiences from other sectors such as the stockpiling of oil and petroleum products and the accumulation of precious metals (essentially platinum and palladium) within physically-backed Exchange Traded Commodities (ETCs) as these can offer useful insights into stockpiling more generally, or, in the case of ETCs may have an impact on the markets for the fourteen materials that have been designated as critical for the EU. Current and Past Stockpiling Activities Outside the EU This study has examined current and past non-energy raw materials stockpiling activities around the world with a focus on four selected countries: China, Japan, the Republic of Korea and the United States of America. The key findings of the analysis for these four countries are: information on the workings of raw material stockpiling in China is particularly sparse; Japanese and Korean authorities also do not provide detailed information abouttheir programmes; the US stockpile is purely ‘strategic’ but the other three both ‘strategic’ and ‘economic’ ; while in all four countries stockpiling is undertaken by central government (and stocks are held by public sector organisations), in Japan non-obligatory stockpiling targets for private companies are also in place for certain materials; with the exception of fluorspar and graphite, all other raw materials designated as critical for the EU are stockpiled by at least one of the countries. Only cobalt and tungsten have been confirmed to be stockpiled by all four; the two stockpiling systems that are most relevant to any potential schemes in the EU (Republic of Korea and Japan) have stockpiling targets in place corresponding to 60 days’ of domestic consumption or imports; in relation to the costs of current stockpiling programmes for non-energy non-agricultural raw materials, information is limited and, in the case of China, close to non-existent. Even where information is available, a lack of data about the circumstances surrounding cost estimates means that a reliable assessment of their applicability to a potential stockpiling scheme in the EU is not possible. Therefore, a clear-cut picture of the costs of raw material stockpiling cannot be based on evidence from existing schemes but rather on estimates drawing on unit costs from a variety of sources; and there is limited information available on material releases in China, Japan and the Republic of Korea; Japanese and Korean stockpiles have generally not been released in the past. In the USA, several releases have taken place since the creation of the stockpile. Most notably, since 1993, the US Congress has authorised disposal of over 99% of the material held in the - i - Stockpiling of Non-energy Raw Materials – Final Report National Defense Stockpile. Recently, however, the sales of the thirteen materials recommended for reserve were suspended as a result of the ongoing work on the reconfiguration of the US stockpile (Be, Co, Ge, In, Nb, Pt, Ta and W among them). In the period 1967-1976, there were sales of significant quantities of cobalt from the US stockpile and it is likely that this constant supply prevented any spikes in prices. On the other hand, it has been suggested that tantalum releases post 1950s have not had a noticeable impact on smoothing out price spikes; and limited information is available on the criteria and thresholds that trigger stockdraw and on the methods for allocating released stocks. In Japan, stocks appear to be sold off and in the Republic of Korea, priority is given to SME users. In the US, materials are sold by means of competitive tenders (however, these sales are not in response to emergencies bur rather a result of planned downsizing of the stockpile). On the other hand, no current stockpiling of non-energy non-agricultural raw materials is believed to be undertaken in the EU, although stockpiling programmes for certain materials existed in the past in countries such as France, the Slovak Republic, Sweden and the UK. Several other EU Member States appear to have, at different points in time, also considered the creation of stockpiles but decided against it. Due to availability of information and analyses, stockpiling of oil and petroleum products provides a very useful inventory of issues, methodologies for their assessment and potential solutions that warrant consideration in relation to stockpiling more generally. This includes the existence of an optimal stockpile size, criteria triggering stockdraw (within the Internatinal Energy Agency system, this is currently based on a wide range of criteria and regular market analysis), organisation of a stockpiling system based on the European Commission establishing stockholding targets for Member States, etc. Finally, investment in physical metal held in ETCs does not appear to act as a depository of material that can be easily tapped into in the event of a supply disruption. These ETCs appear to act as long-term, generally conservative investments not prone to quick redemptions when prices abruptly increase. Moreover, platinum and palladium are predominantly industrial (as opposed to investment) metals, and in their limited lifetime, these ETCs appear to have had only a limited (and disputed) impact on material prices. Hypothetical Scenarios for Stockpiling of Raw Materials in the EU Outline of the Scenarios This study considers the following four possible Scenarios for future EU stockpiling of non- energy non-agricultural raw materials: Scenario 0: Do nothing; Scenario 1: Stockpiling by a dedicated EU body; Scenario 2: A new EU legal Framework Mandating Member State stockpiling; Scenario 3: Mandatory stockpiling by Industry, with two sub-Scenarios: • sub-Scenario 3A: mandatory industry stockpiling with financial incentives (e.g. loan guarantees); and • sub-Scenario 3B: mandatory industry stockpiling without financial incentives; Scenario 4: Voluntary stockpiling by Industry, with two sub-Scenarios: • sub-Scenario 4A: voluntary industry stockpiling with financial incentives (e.g. loan guarantees); and • sub-Scenario 4B: voluntary industry stockpiling without financial incentives. - ii - Risk & Policy Analysts These scenarios have been selected for analysis because (a) they reflect varying levels of responsibility for a stockpile (EU, Member States, private companies) and (b) they mirror real- world examples of stockpiling, such as: stockpiling organised and financed by the central government as in the four key countries examined; a supra-national regime mandating countries to hold stockpiles similar to that implemented in the EU for oil and petroleum products; and stockpiling undertaken by the private sector on a mandatory or voluntary basis, similar to oil stockpiling in some EU Member States and to non-energy non-agricultural raw material stockpiling by Japanese companies. In order to weigh up the advantages and disadvantages of the alternative stockpiling policy scenarios, it has been necessary to first define the purpose of the possible stockpiling scheme. For this assessment, the objective of raw material stockpiling is purely economic and is deemed to be the provision of an alternative supply source in the event of a short-term or medium-term supply disruption, rather than counteracting more permanent market imbalances. Furthermore, it is assumed that the focus of a stockpile would be on addressing physical