UK’s critical minerals sector warns of banks’ aversion to commodities

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Stephen Hall was on his way to Windsor Castle to receive an international business award from King Charles last month when his phone rang. Lloyds Bank has rejected an application to refinance its critical minerals group, which supplies top clients including engineer Rolls-Royce.

The UK lender’s chief credit officer found a red flag that prevented him from backing Advanced Alloy Services: the company’s exposure to volatile nickel prices after a brief London Metal Exchange rally sent prices up more than 200% in one period. day of 2022.

“The debacle with Lloyds consumed an enormous amount of time, energy and resources. It’s traumatic to come out of it with nothing,” Hall said.

The funding problems of 31-year-old AAS echo those of other UK metals groups, highlighting how the government’s minerals strategy is at odds with the approach of UK banks, which act as gatekeepers to a key mechanism state support.

First published in 2022, the UK’s critical minerals strategy aims to diversify supply chains beyond China – the industry’s monopoly power – for metals seen as essential for clean energy, electric cars and defence.

London highlighted 18 minerals of “high criticality” to the economy, including cobalt, graphite and tin. Five more, including nickel, are on the watch list of metals that could trigger economic vulnerabilities in the event of sudden supply shocks.

However, even though the UK’s lack of domestic resources means it is focusing on supporting processing businesses such as AAS, companies say UK Export Finance (UKEF) support mechanisms require domestic lenders to increase their tolerance for of the risks associated with commodity markets.

Guarantees provided by the government’s export credit agency are designed to increase the risk appetite of private lenders, but can only be accessed through approved banks and other financial institutions.

The government’s other main funding tool to support critical mineral projects is the UK Infrastructure Bank (UKIB), which offers a wide range of equity and debt ventures.

Hall said AAS – which has doubled its turnover from 2021 to an estimated £60m and has been profitable for 30 of 31 years – wanted to refinance with Lloyds to reduce costs annual funding of £1.3m following the completion of a management buyout.

A deal would have given the company more room to get support through UKEF. But after seven months of meetings and audits, as well as notifying AAS of its existing lender, Lloyds denied the funding at the last hurdle.

The high-purity metal supplier has no direct exposure to LME nickel prices, but makes more margin in a rising market and less in a falling market.

The bank later clarified that it had concerns about the future value of inventory that was not yet supported by customer orders, according to Hall.

“For the UK Government to support the development of a more resilient critical supply chain, then banks must be prepared to provide support,” said Hall, who is also chairman of the Minor Metals Trade Association.

He added that lenders “should not prevent access to the UKEF simply on the basis that they are ‘exposed’ to the same markets that the UK government wants to develop”.

Jeff Townsend, founder of the Critical Minerals Association, a trade group, said several other producers had faced similar funding challenges with UK banks and would face more problems as Beijing tried to manipulate the prices of the strategic metals .

“The government’s critical minerals strategy has limited influence on how the City of London and the financial sector operate,” he said. “It really is a problem and it will be more and more. How does the government integrate the financial sector?”

An executive at another UK metals group, who requested anonymity, said another major bank canceled its financing lines last year without explanation, prompting it to cut more than half its workforce. work and withdraw expansion plans.

“They rubbed me against the carpet,” the person said. “UKEF can only push (support) on one route. They have to find a way around the banks.”

Advisers working on financing packages for critical minerals projects said most UK banks were wary of backing commodity businesses because of the risk of price fluctuations. By contrast, European lenders such as Société Générale, ING and ABN Amro were more comfortable with such risks, they said.

Lloyds said it did not comment on specific cases, but said it provided banking services to around 1 million UK small and medium-sized businesses, “supporting businesses across sectors and sizes with the products and expertise they need to- and fulfill ambitions to grow. “.

The Government said: “A secure supply of critical minerals is vital to our industrial strategy, economic growth and clean energy transition.

“We are supporting our essential minerals industry with the support of UK Export Finance” and investment from UKIB, he added.