UK's Critical Minerals Sector Warns Banks of Product Aversion

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Steven Holl was on his way to Windsor Castle last month to receive an international business award from King Charles when his phone rang. Lloyds Bank had rejected his application to refinance his Critical Minerals Group, which supplies blue-chip clients including engineer Rolls-Royce.

The UK lender’s credit chief has identified a red flag that could be holding back support for Advanced Alloy Services: the company’s exposure to volatile nickel prices following a short squeeze on the London Metal Exchange that sent prices soaring more than 200% in a single day in 2022.

The Lloyd tragedy took a tremendous amount of time, energy and resources. To come away with nothing was shocking, Hall said.

The funding woes faced by the 31-year-old AAS mirror those of other UK metals groups and highlight how the Government’s critical minerals strategy is at odds with the approach of the Bank of England, which acts as gatekeeper to a key national support mechanism.

The UK’s Critical Minerals Strategy, first published in 2022, aims to diversify supply chains beyond China, the industry’s dominant player in metals vital to clean energy, electric vehicles and defence.

London has identified 18 minerals that are critical to the economy, including cobalt, graphite and tin. Five minerals, including nickel, have been placed on a watchlist of metals that could create economic vulnerability in the event of a sudden supply shock.

But despite the UK's focus on supporting processing firms such as AAS due to limited domestic resources, businesses say domestic lenders will need to increase their tolerance for commodity market-related risks if they are to use the support mechanisms offered by UK Export Finance (UKEF).

Guarantees provided by government export credit agencies are designed to increase the risk tolerance of private lenders, but are available only through approved banks and other financial institutions.

Another key funding tool used by the government to support critical minerals projects is the UK Infrastructure Bank (UKIB), which provides equity and debt to a range of companies.

Hall said AAS, which has doubled revenues since 2021 to about $60 million and been profitable for 30 of its 31 years, wanted to refinance from Lloyd's to reduce its $1.3 million annual funding costs after completing the management buyout.

The deal would also have given the company more room to seek support through UKEF. But after seven months of meetings and audits, and AAS notifying its existing lenders, Lloyds declined to fund it at the last hurdle.

High purity metal suppliers are not directly exposed to LME nickel prices, but their margins increase in rising markets and decrease in falling markets.

According to Hall, the bank later made clear its concerns about the future value of inventory not backed by customer orders.

Hall, who is also chairman of the Small Metals Traders Association, said banks must also be prepared to provide support if the UK government is to support the development of more resilient critical supply chains.

He added that lenders should not be blocked from accessing UKEF simply because it exposes them to markets the UK government wants to develop.

Lloyds Bank Denies Funding for Advanced Alloy Services at Last Hurdle Jason Alden/Bloomberg

Geoff Townsend, founder of the Critical Minerals Association, a trade group, said several other producers had faced similar funding problems from British banks and were likely to face more problems as Beijing sought to manipulate the price of the strategic metal.

He said the government's major minerals strategy had limited impact on the way the City of London and the financial sector operated. This is a real problem and will become increasingly so. How will the government engage the financial sector?

Another executive at a British metals group, who asked not to be named, said last year another major bank cut funding lines without explanation, leading to the group cutting more than half its staff and scrapping expansion plans.

They rubbed me on the carpet, the guy said. UKEF can just push it away. [support] One way. They have to find a way around the bank.

Advisers who work on financing packages for critical minerals projects said most British banks were reluctant to back commodities businesses because of the risk of price volatility, while European lenders such as Socit Gnrale, ING and ABN Amro were more comfortable with such risks, they said.

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Lloyds did not give specific examples, but said it provides banking services to around 1 million small and medium-sized businesses across the UK, supporting businesses across a range of sectors and sizes with the products and expertise they need to achieve their growth ambitions.

The government said: A stable supply of critical minerals is essential for industrial strategy, economic growth and clean energy transition.

He added that UK export finance support and UKIB investment are supporting our key minerals industries.

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