US Needs More Than Mineral Reserves, Needs Infrastructure
Last month, Ganfeng Lithium, China’s largest lithium producer and refiner, announced plans to set up a $1.1 billion trading table “to reduce the risk of market volatility” related to its growing international mining operations. By investing in China’s market infrastructure, the move will deepen the country’s existing market presence and could threaten US attempts to build a supply chain for the precious mineral. . This development should inspire serious thought among policymakers and industry leaders in the United States: it underscores the need to expand the toolkit to strengthen our competitiveness in a sector critical to the clean energy transition and national security. .
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The global market for precious minerals is currently dominated by a few key players, mainly China. By 2023, China was responsible for more than 65% of the world’s rare mineral production. It also leads the way, refining more than 35% of the world’s nickel, 58% of lithium, and 70% of cobalt. By managing supply and demand — China provides enormous market power. This prominence is the result of strategic investments made over decades, which show the foresight to recognize the future importance of these resources in many strategic sectors including energy and defense.
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However, the Ganfeng announcement reveals another important aspect of China’s leadership: governance market infrastructure. As the demand for these once-existing minerals rises, the financial means of selling them becomes even more important. Market infrastructure, such as cleared contracts, is important for building capital, ensuring price transparency, and reducing volatility risks. This is the role that well-known benchmarks such as Brent and West Texas Intermediate play in the global oil market.
Currently, for many precious minerals, including lithium and cobalt, the only physically cleared contracts (the preferred hedge for producers) are on exchanges such as the Guangzhou Futures Exchange (GZE). Cash-settled contracts exist but are also heavily affected by Chinese supply dynamics and are not perfect as tools to prevent producers.
The implications of this extend beyond China’s borders. Consider a lithium producer in Quebec supplying a US electric car manufacturer. A common industry practice would be to reference the contract price to an index such as the Fastmarkets Asia index. However, since this index is closely related to supply conditions in China, price reductions caused by overworking in China lower the value of the contract for the Quebec manufacturer, reducing taxes and threatening investment. in the future.
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As Ganfeng brings money into these existing financial markets, China’s control of the market infrastructure will only deepen. For the US to become less dependent on such a crowded market, yes, it requires new supply to come online and use tools like stockpiling. But it also needs to create different, stronger market mechanisms to ensure a free, stable and fair market for all participants.
Fortunately, the United States has an opportunity to strengthen its competitiveness in the key mineral sector. With the growing interest of the private sector as demonstrated by the entry of the Singapore-based Abaxx exchange into the battery metal sector, it is now necessary to take steps to build a more sustainable financial infrastructure that which does not suffer from problems of excessive inactivity.
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The federal government has tools that can encourage the development of water finance markets for critical resources. Employ America previously proposed that the Department of Energy’s Loan Program Office (LPO) use its lending authority to support marketing activities in the logistics sector. By guaranteeing loans under its “Innovative Supply Chain Program,” the LPO could enable the creation of a special purpose vehicle (SPV) that would act as a business entity, handling the activities a variety of market to help producers to prevent the rise of prices.
We have also proposed* that Congress rename the Strategic Petroleum Reserve as the “Strategic Resilience Reserve” (SRR). Based on the Federal Reserve’s approach to financial stability, the SRR will use both restrictive and active instruments to stabilize asset markets. Traditional measures may include long-term fixed-price contracts, establishing minimum assets, and non-purchase loans to address the lack of investment. If prices rise, SRR can release the reserves to end users and sell options to upstream producers. In times of stress, SRR can remove excess supply from the market and provide financial support for additional storage or bridging for upstream participants. This dual approach to market stabilization and crisis mitigation will help ensure a self-sustaining market response, maintaining balance between supply and demand for a non-volatile commodity such as lithium. Importantly, since the Fed uses market-based measures to stabilize the financial system, the SRR will use market-based methods to achieve asset market stability. By selling financial instruments through new physical contracts, SRR can provide “start-up money” for unexpected market structures and challenges in foreign markets such as domestic supply services in China. .
The time to act is now. The precious mineral sector is developing rapidly, and the United States has the opportunity to play a leading role. By creating our own strong financial markets and business models for these critical resources, we can improve our competitiveness, stabilize supply chains, and accelerate our clean energy transition.
Important problems. Our ability to meet climate goals, ensure national security, and maintain technological leadership in the 21st century all depend on securing a reliable and diverse supply of precious minerals. Ganfeng’s announcement should act as a catalyst for action. It is time for the United States to step up and defend its position in this important sector, not through conflict but through innovation, investment and strategic foresight.
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*This article was written with Daleep Singh before he joined the administration as Deputy National Security Advisor for International Economy.
Arnab Data is the Director of Strategic Implementation Management at Employ America.
Ashley George is a member of the Employ America program.
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