Markets for Critical Minerals Are Too Prone to Failure

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About the authors: Cullen Hendrix is senior fellow at the Peterson Institute for International Economics, nonresident senior research fellow at the Center for Climate & Security, and professor at the University of Denver. Morgan Bazilian is director of the Payne Institute for Public Policy and professor at the Colorado School of Mines. He was previously lead energy specialist at the World Bank.  

In March, the London Metals Exchange suspended nickel trading after prices spiked over 250% in two days. Much of the spike occurred in an 18-minute window that—if the LME’s court filings are to be believed—almost caused the collapse of the nickel market, many of its major players, and the LME itself. 

Whether the LME was truly in mortal peril notwithstanding, the nickel debacle highlights one of the underappreciated financial challenges that green-energy transitions will bring: Markets for many critical minerals are small, thin, and opaque. Markets with these structures are prone to failures such as cornering, natural disaster- and geopolitically-induced supply disruptions, and murky, inefficient price discovery processes. All of those attributes lead to inefficient market signals for investment and can cause huge roadblocks to production. Creating a greener energy future will require expanding and reforming the market infrastructure underpinning the raw materials on which renewable energy systems depend.

The energy transition has significantly increased demand for some minerals and metals. This is putting short-term stress on markets, trade patterns, geopolitics, and, perhaps most importantly: prices. As a result, for the first time in decades, we are seeing prices increase for many clean-energy technologies. Critics argue that rising prices will likely have a negative impact on the deployment and competitiveness of clean energy, and thus stall aspects of energy transitions. One clear area of focus is to improve the transparency, governance, and price discovery in those markets that have sufficient scale. 

The total value of exported nickel and nickel-related products (ore, bars, scrap, etc.) in 2020 was $26.4 billion, with a total market (domestic and international) perhaps twice that. That’s real money, but even a $50 billion market is peanuts compared to the size of markets for other industrial metals like steel and hydrocarbon fuels like petroleum and natural gas. Over 1 million contracts for West Texas Intermediate crude are traded daily on the New York Mercantile Exchange, with several million contracts in open interest. The LME currently has only 13 total open-interest contracts for cobalt in play. This smaller size presents opportunities for traders—sometimes even lone, rogue traders—to develop market-cornering positions, constricting supply and causing price spikes. This dynamic was at play in the nickel debacle, but it had occurred before in copper trading. Small markets mean comparatively small sums of money can have outsized effects for prices and global green energy supply chains.

Markets for many critical minerals are also opaque and lack liquidity, with comparatively few large producers, consumers, and exchanges. This is true of the mining companies that produce critical minerals: Glencore produces nearly 20% of global cobalt, and four companies account for 60% of global lithium. The problem is even more acute at the country level. The Democratic Republic of Congo produces 70% of global cobalt, Australia 54% of lithium, and China 60% of rare earths. Under these conditions, markets are one natural disaster or geopolitical crisis—like the Ukraine crisis, which roiled global energy and food markets—from upheaval. The case of cobalt in the DRC is the most well-known. And more recently, abuses of Uyghur workers in China’s Xinjiang province have raised prices for solar technology and slowed its deployment in the United States and elsewhere. Even setting natural disasters and geopolitical risks aside, markets 

An international effort needs to be undertaken to build the foundations of well-functioning and well-governed markets for the major critical minerals key to the global supply chains for technologies like electric vehicles and solar panels. The US Critical Minerals list currently lists some 50 minerals. In practice, a list that long is antithetical to establishing clear priorities and building more robust markets. Efforts are better spent instead on identifying five to seven areas of focus: perhaps bauxite (alumina ore), cobalt, copper, lithium, nickel, graphite, rare earths. Graphite futures, for instance, are not traded on either the LME or the NYME, despite its demand being forecast to grow 25-fold by 2040 to meet net-zero emissions targets. Those efforts can be supported through diplomatic channels like those already started at the U.S. State Department under both the Trump and Biden administrations. Such improved markets will require better regulatory oversight, data provisions, and the fundamental building blocks of stable trade. 

The effort will not be a quick win, and will need dedicated support and human resources over 5-10 years to get established. Efforts to bring transparency to price, such as those offered by shops like Benchmark Minerals, are an essential early step in more trusted markets. Lessons learned in other commodities markets will be useful, as will knowledge from chemicals trade. Among those lessons should be to carefully regulate the creation of index funds around these commodities. Index funds may not affect prices or trade volumes much for commodities around which there are established, diversified markets—like many agricultural commodities and oil—their effects for thinly traded critical minerals could be more pernicious.

The Ukraine crisis has refocused attention on commodities markets and the dire consequences a few influential actors can have for global energy and food security. As demand for critical minerals ramps up, it is crucial that resilient market infrastructure ramps in tandem. A smoother, lower-cost transition to a more sustainable future hangs in the balance.

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