Some thoughts on Critical Minerals: Cautious Optimism, Worries about Chinese overcapacity

The following post draws on conversations around critical mineral supply chains I’ve had in the last few months including some recently around the SAFE summit in DC earlier in March.

Among market participants, there continues to be significant optimism about the overall policy support for renewable energy supply chains and battery development due to incentives from the IRA and related policies. However, the big problem lurking as usual is China, where added capacity and efficiencies at home and abroad, especially the dominance of processing supply chains are bringing down price. The new mines and processing facilities that seek to avoid China face higher interest rates, higher labor costs and in some cases higher environmental standards. It remains to be seen if they break even with the subsidies and there are even big challenges without especially for some of the well-supplied sectors.

There are two big problems both linked to China’s dominance of the supply chain, especially in processing. The US and allies are still in relatively early stages of developing processing capabilities and new innovations but many of the ideas are either not available at scale yet and are costly. China controls the processing supply chains both at home and increasingly in the countries where supplies are mined, many of which are asking for more technology transfer. The US and allies may be trying to catch up, but they are doing so slowly at at cost. Also, as I suggested with some colleagues in Canada’s Globe and Mail last year, there has arguably been more investment in later stages of development including battery assembly, and less on the mining and intermediate terms of production and processing. That may be changing, with some new mining projects greenlit and some pilot projects on processing and recycling.

The big challenge is one of price – both volatility and level.  New supplies of critical minerals such as Lithium, Cobalt and Nickel entering the market have increased, or at least outstripped demand, as China or China processed facilities in third countries come online and demand fails to keep up. This has benefited consumers and end buyers of EVs, but hurts new projects hoping to build alternate non-China or less-China supply chains. Meanwhile costs are increasing in developed economies due to the scramble for more production (coincident booms drive up labor and input costs) and it’s not yet clear that intermediate or end users will pay the premium for these supplies at least in the short-term or pay the green premia. Tariffs (see below) may be considered as part of the solution, but the US allies will need to make sure that China does not also improve environmental standards to meet those new targets if excluding Chinese cheaper inputs is the primary goal. 

The long-term nature of investment, subsidies and less short-term price concerns suggest that Chinese business, and perhaps increasingly Saudi Arabia may be better placed to invest in third countries as they are less concerned about short-term losses. Saudi Arabia of course lacks the processing expertise and is relatively new to metal mining, but has petroleum prowess. It also is seeking to develop ways to better financialize some of the critical material supply chains. This may lack volume  as other attempts to establish new benchmarks. 

“Market shaping mechanisms” There is thus a growing consensus – if quiet – among many US officials and some industry participants. that various elements of a government supported price mechanism may be necessary to provide certainty to producers. The shape is not yet agreed but could include public private partnerships to incentivize development of stockpiles of key metals, government insurance to derisk certain supply chains and make buyers more comfortable about signing off-take agreements. These, proponents suggest would address the chicken and egg problem of insufficient supply at uncertain price for off take agreements, and might make lenders more comfortable to invest, thus allowing exports. At this point many in the industry recognize the problem but here isn’t yet a consensus idea of what these policies would look like.  

US Industrial policy is rolling out a lot of new investment, but there are questions on skills availability, wage and input inflation. Administration officials and state-level officials are very proud of the many new facilities green-lit following IRA, BIL and CHIPS, many of which are battery plants, but questions remain which will actually be used. Targeted immigration for skilled labor, more investment in building out the supply chain will likely be necessary. Some of said grants are now rolling out – especially for CHIPS Plants. Questions on the definitions of Foreign entity of concern for EV battery supply chains are a key issue as the current permutations allows ostensible private sector players such as BYD to participate. 

Some of the most promising areas for processing seem to be in techniques that can be used on recycled materials. US/North American export bans on electronic waste are coming into effect, limiting the potential export back to China for future batteries. The EU is among those investing more heavily in recycled mandates. The techniques aren’t at scale, but this may be an area to get more government support ahead. Some participants pointed to technologies used to develop Polymetallic nodules harvested from under water – and recycled materials. Of course the US, not a UN law of the Sea signatory is handicapped from major seabed harvesting, which is still at an early phase. And of course there are plenty of questions about what harvesting may do to the deep ocean. Other innovations include proposed batteries that would reduce the need for graphite (which China controls), but it remains to be seen if these can be developed or used at scale. 

Election Worries, What if there’s a Trump administration? Support for US manufacturing is bipartisan, but tools will differ and the environment may be less supportive for US developed allies. The current proposed GOP policies would seem to suggest less balance sheet support, more tariffs. Though tariff comfort does seem to be a bipartisan issues. Republican representatives and governors are gun-ho on development projects, the need for investment, and are interested in tailoring training/university programs to what industry needs, but likely Republican officials seem to want to rely on tariffs, import restrictions and overarching tax cuts rather than as much targeted government funding in the sectors that have been prioritized by the Biden Administration. Also, it seemed like the mandates for US/Friendly country components may face less support. Some tax credits are still likely of course, especially at state level, and already allocated funds are to be continued, but expect less balance sheet support and more tariffs. Watch for tariffs to come back for example on solar panels from SE Asia which currently benefit from a temporary waiver as the US prioritized installation cost reduction. 

Other questions for tariffs might be around environmental standards which could be seen as a way to block Chinese investment – some internationalist Republicans were surprisingly supportive of environmentally linked border adjusted tariffs – something which seems aligned with Europe’s CBAM. There’s a lot of detail to be worked out and this looks to be an area where different groups vying for policy influence in the Republican Party will debate. On the Democratic side, in a next administration ideas of a similar vein would include Section 301 tariffs perhaps in coordination with allies (EU, Canada, etc) on environmental grounds. But doing so would still require these developed economies to figure out their own environmentally conscious and scalable way of concentrating and processing key minerals – and find ways to get new friends on board. There was a lot of optimism about realizing the scope of the problem, but still a lot of worries about how many countries are separately trying to develop supply chains rather than work together. Meanwhile, many of the EM countries with resources want to work with developed economies as well as with China, who is more willing and able to do technology transfer. These debates will be part of a broader question about the role of trade policy ahead.