Today's Deep Dive is 1,218 words and an 8-minute read.
The convergence of geopolitics and the transition to green technologies has put the critical minerals supply chain in the policy spotlight as risks mount over access to and control over essential metals and minerals. Demand for critical minerals is expected to grow exponentially, outstripping current supply capacity. Additionally, experts have been warning for years that Chinese dominance over mining and refining capabilities creates strategic vulnerabilities for the US and its allies. The moment of truth has arrived.
These minerals – which include graphite, cobalt, gallium, nickel and many others - are essential inputs for clean energy technologies and will have increasing importance over the coming decades. Policy and trade actions dealing with critical minerals are unfolding fairly quickly, creating immediate risks for supply chain disruptions during this period of transition. A recent trade action of note is Beijing's decision to limit the export of antimony, a component used in solar panels, wind turbine components, and liquid metal batteries. As the US and its allies forge new and secure supply chains through foreign policy engagement, industrial policy and market actions, the policy remedies are likely to take longer to develop and have longer horizons, while the sting of retaliatory trade actions will be felt immediately and fuel market instability.
Trade Actions Fuel Supply and Price Instability
The new export restrictions announced by China this week are part of a larger trade struggle between the US and China over technology and economic dominance. The US is restricting the export of semiconductors, quantum technologies and AI systems. China is hitting back where the US is most vulnerable, restricting the export of critical minerals. This week it is antimony; last year it was gallium and germanium, both used to make computer chips. China accounts for about 87% of global production of antimony and 98% and 93% of global production of gallium and germanium, respectively.
Western countries have accused China of overproducing and dumping lithium and cobalt on the international market, which they allege bottoms out the price and the ability of for-profit companies to compete. The prices of cobalt and lithium plunged more than 75% from peak levels in 2022. With the market oversupplied and Western mining companies in survival mode, Beijing is likely betting that Chinese operators will be far better positioned to ramp up production once inventories are depleted and green technology demand gathers steam.
China's ability and incentives to disrupt Western efforts to reshape the critical minerals supply chain should not be underestimated. China currently dominates the global supply chain, and maintaining that position will be viewed as a matter of economic security for its future.
Foreign and Domestic Policy: Critical Mineral Policy Framework for Secure Supply Chains
In June 2022, the US and its partners launched the Minerals Security Partnership (MSP), a key minilateral group composed today of 14 countries, plus the EU. The MSP aims to accelerate the development of diverse and sustainable critical energy minerals supply chains through working with host governments and industry to facilitate targeted financial and diplomatic support for strategic projects along the value chain. The MSP has adopted core principles consistent with recognized ESG standards, including transparency, responsible stewardship of the natural environment, consulting with and creating benefits for workers and local communities. To date, the MSP, working through its operational arm, the MSP Forum, supports 32 projects across the range of mining, extraction, processing, recycling and recovery business cycle. Ten projects include rare earth elements. Projects are situated in Africa, the Americas, Asia-Pacific and Europe. The MSP Finance Network, launched in September 2024, connects development finance institutions and export credit agencies of the MSP partners, creating new mechanisms for cooperation, information exchange and co-financing.
Outside the framework of the MSP, the US and EU are advancing "friend-shoring" by signing bilateral cooperation agreements or MOUs with neighbors and partners to develop complementary resources and diversify mineral supply chains. The US has agreements encompassing critical minerals with Australia, Japan, India, Indonesia, Argentina, Peru, Serbia, and most recently, Ukraine. The EU has agreements with Greenland, Norway, Uzbekistan, Kazakhstan, Serbia, Australia, Canada, Argentina, Chile, the Democratic Republic of Congo, Zambia, Namibia and Rwanda. Additionally, Washington and Brussels are negotiating a critical minerals agreement, seeking a mechanism to include EU-extracted or processed critical minerals in the content count towards US Inflation Reduction Act's electric vehicle tax credit requirements.
Increasingly, industrial policy is being used to create or strengthen domestic capabilities in the critical mineral supply chain. In the US, these policies include the Inflation Reduction Act (IRA), with its percentage requirements for mineral content for EV batteries from the US or countries with which the US has a free trade agreement and the corresponding requirement to reduce reliance on "foreign entities of concern," i.e., China. The US also is extending a 10% tax credit for mineral production, and tax cut for producers of solar and wind component, batteries and certain critical mineral project.
In March 2024, the EU adopted the European Critical Raw Materials Act which similarly seeks to strengthen domestic supply chains, with investment in all stages of the value chain, setting domestic targets for extraction, processing and recycling.
Market Actions: Critical Minerals Trading Market and Buyers Club
Increasing the supply of critical minerals is necessary, but ensuring stable market dynamics also requires addressing vulnerabilities in market infrastructure influenced by any single country's control. Market infrastructure, like benchmarking, is necessary for building liquidity, price transparency and managing volatility risks. Currently, what little benchmarking exists is done on Chinese exchanges and is not transparent.
US National Security Adviser Jake Sullivan, speaking at a think tank in mid-October, signaled that the US is preparing to launch a new effort to address this gap. Sullivan said, "We are working with [our partners] to create a high standard, critical mineral marketplace, one that diversifies our supply chains, creates a level playing field for our producers, and promotes strong workers' rights and environmental protections." Sullivan stated that details on the marketplace initiative would be released "in a matter of weeks."
While creating a new trading market is a big initiative that will take time to stand up and attract a new cohort of commodity traders and investors, the EU is taking a different tack, focused on influencing pricing through a joint purchasing mechanism. The EU is developing a platform that will pool together buying orders for critical minerals (plus natural gas and hydrogen). The EU hopes to have the platform operational by early next year.
Risks for Businesses
The primary risks to businesses will be regulatory changes that impact access to critical minerals at stable pricing. Trade actions risk additional retaliatory export restrictions by China, perhaps on tungsten, vanadium or magnesium. Alternatively, Beijing could tighten existing limits on the exports of antimony, gallium and germanium to outright bans to countries of concern. Strategic manipulation of supply could be used to destabilize global prices for specific minerals.
In the US, there is uncertainty that current subsidies and tax breaks will remain in place, potentially flattening the domestic demand curve for critical minerals. There is also the possibility that geopolitical tensions and a trade war might heat back up, with the US imposing new tariffs or take trade actions against Chinese exports, or that the upcoming presidential election could stall or derail existing plans as a new administration could change course on policy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.