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Setting the Scene
With the Bipartisan Infrastructure Law (BIL), Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act all in place, albeit with tax rules still evolving, and with the EPA’s clean vehicle rule finalized, and with other initiatives being pitched in a volatile election cycle, a fair question for inquiring minds is: What does it all mean for the coming year and beyond?[1]
A distinct possible answer is — not much, or certainly, not what we might, or have come to, expect. Those who view these actions as signals on climate commitments tend to also view them as first steps, baby steps even, in the drive to decarbonize and reshape both energy and economic systems in the U.S. and abroad. But they are much less about any of that and much more about increasingly complicated domestic political drivers and intensifying geopolitical competition. As such, these laws and regulations reflect an amalgam of pressures, aspirations, hopes, and fears on all sides. Not least is the fear of losing out in the obsessively tracked technology race with China, in a potentially China-anchored new world order. Crucially, views on the spate of U.S. government actions are predicated upon governments continuing to provide the taxpayer grease needed for returns on capital. Seldom asked is whether taxpayers will remain willing, if they ever really were, to be the de-riskers of last resort.
All of this should be fodder enough for heightened risk and uncertainty in outlooks. Worse still is a vital underlying assumption, if not fully explicit, across every bit of the energy transitions landscape — that materials supply chains will deliver on time and in a cost-effective way.
Confusion about materials supply chains overburdens energy technologies and businesses, and spills into political fronts. How the extractives industries interact with other economic sectors, such as supply-demand balances and price signals, over the next year or so and beyond is no longer a simple story about oil and gas investment, fuel deliverability, and prices. Now, and going forward, the mix of different commodities, their market fundamentals, and the associated reactions and responses from different stakeholders is much more complicated. This is true even before considering possibilities that resource owning governments, including the U.S. federal domain, might abrogate mining contracts, unilaterally increase takes — royalties and taxes — or mandate higher shares for their national mining companies.
The Disconnect
With regard to the basic industries that deliver the critical raw materials inputs for manufacturing, a profound disconnect exists between political aspirations and the economic realities that drive investment decision-making. That disconnect reflects some truisms in modern societies. One, we tend not to know where stuff comes from; two, worse, we tend not to care; and three, we do not want the production of what we consume to happen in our proverbial backyards. Of course, these generalizations do not apply to every individual, but for modern societies as a whole, they fit.[2]
The disconnect is rooted in desires to promote long-favored energy technologies such as wind, solar, and battery energy storage for power grids and mobility. All of these were originally proposed as solutions for the energy security crises of the 1970s and ’80s, and later championed as solutions to concerns about climate change. However, these favored alternative energy technologies have a most inconvenient dynamic. In short, the thermodynamic attributes of key components of the green energy kit result in a shift to lower energy density technologies with higher materials intensity. Not only does this dynamic run counter to dematerialization trends linked with economic development, but it also, in simplest terms, means more capacity to displace energy dense, carbon-based fuels.[3] Compounding the push to greater materials intensity is an electrifying world committed to renewable energy sources. Much more system-level support is needed to deal with variability associated with intermittent generation assets such as wind and solar.[4]
All of these factors, in turn, place more stress on materials supply chains that must expand considerably to keep pace.[5] Meanwhile, like other industries, the materials businesses from upstream to downstream are being subjected to the same pressures to decarbonize and demonstrate sustainability, among many other challenges. This makes for a unique circumstance as minerals suppliers strive to respond to green energy requirements while also meeting continued growth in consumption of minerals and metals in traditional non-energy sectors and for defense.[6]
The Evolution of Interest in Critical Minerals
The breadth of media coverage on critical minerals provides some evidence of the disconnect between political aspirations and economic realities. As evidenced by Figure 1, expressed interest in critical minerals clearly has evolved. A significant inflection has taken place since 2020, but the uptick began a decade earlier.
Figure 1 — Evolution of Interest in Critical Minerals Worldwide
Note: According to Google Trends, the Interest Index represents “search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.”
In the early part of the 2010s, falling costs of wind, solar, and battery components provided a boost to forecasts of increasing market shares for these technologies and drove greater advocacy efforts for more assertive policy and regulatory support. Any research or statements that hinted at potential stresses in raw materials supply were either discounted or viewed to be manageable.
At the end of the decade, the COVID-19 pandemic seemed to signal the dawning of peak oil demand.[vii] In addition, supply chain disruptions during the pandemic and as it eased increased transparency around China’s dominance of green energy materials and manufacturing, both of which were major reasons for perceived low costs of the green energy kit in the first place. Convergence of these developments triggered the first realizations of disconnect.
Exiting 2020, as the pandemic fog lifted, political imperatives for economic recovery combined with green energy aspirations to yield a flood of new green deal initiatives. In the U.S., they led to significant legislation in subsequent years that included the IIJA, CHIPs Act, and IRA, and have permeated agency rulemakings.
In 2021 and 2022, supply chain constraints coupled with a desired return to normalcy by consumers led to rapidly rising prices for oil and minerals commodities.[viii] Along with rising interest rates aimed at tamping inflation, higher costs undermined the projected profitability of green energy technologies. These same factors and the reliance on taxpayer support bolstered attention to domestic supply chains. The policy discourse became focused on reshoring, nearshoring, and job creation in an effort to bring home next generation manufacturing capability.
Importantly, political concerns about Chinese dominance across minerals supply chains have remained central to policy conversations focused on manufacturing. Over the past couple of years, closer examination of green energy requirements has brought new awareness of materials supply chain fragilities. This ultimately led to a growing recognition among enthusiasts of new energy technologies that significant political risks are associated with minerals and metals supply chains originating in Africa, South America, and other locations.[ix] Of course, improving domestic capabilities could help, but even if local opposition to mining and processing in the U.S. and Europe could be overcome, associated lead times are very long.
In 2023 and 2024, difficulties in executing large scale wind and solar projects and reduced interest in big ticket durables, such as subsidized battery electric vehicles (BEVs), began to weigh on metals prices.[x] In addition, a flood of Chinese-produced raw materials and manufactured components such as batteries and solar equipment hit global markets, in part due to China’s economic slowdown. While the implications for lower minerals and metals prices might seem beneficial for investment in downstream applications, they do not serve the interests of expanding upstream supplies and recycling that will be needed for a seamless expansion of green energy technologies.
Price Formation
Prices are an important vector in determining capital flows into developing and maintaining activity along the entire supply chain. Within the mining industry, cost inflation — driven by long cycle times, higher compliance costs and labor expenses, and increased costs of capital — appears to be not only widespread but nontransitory.[xi] Low prices and high costs result in thin or negative profit margins that bode negatively for investor interest in developing new mining and processing capacity.
As indicated in Figure 2, commodity prices for metals have been significantly more volatile than the price of Brent crude oil. Much of this reflects the relative (to crude oil) lack of depth in metals markets. Strong policy-aided demand signals bumping against lumpy supply-side investments also drive price volatility. The cause is not relevant. Volatility bears implications for investment in the development of incremental capacity. Capacity constraints ultimately slow the pace of adoption of technologies that require metals and materials.[12]
The best mining projects can withstand price volatility, and some operators may still be able to proceed with capital expenditures for decarb strategies and other sustainability imperatives. But those projects represent a relatively small portion of all mining assets.[13] Investors everywhere, even in China with its heavy-handed state intervention, need to be made whole.[14]
Figure 2 — Commodity Price Index, March 2014–June 2024
Note: In contrast to other metals, copper is experiencing a strong boost in prices in 2024 as supply-demand dynamics around that commodity play out.
That suggests, of course, that the persistent question of China’s dominance along supply chains has bearing on price and on what is deemed a politically acceptable price, especially given aggressive green technology adoption goals. In a context of open, fungible global trade with a desire to get green energy technologies into the marketplace at scale and with pace, the source of production should not matter, and Chinese supply chain dominance should be of no concern. However, in a context of proactive domestic industrial policy with high expectations of domestic manufacturing content and jobs and associated economic benefits, Chinese supply chain dominance is, at the very least, uncomfortable.
In either case, it must be recognized that Chinese-produced green energy technology is subject to the same limiting constraints that green technology everywhere faces — the integrity, quality, and reliability of supporting electric power grids and systems must be sufficient for uptake. In many regions, this is a question that regulators, policymakers, and industry actors are grappling with as they push to reduce emissions.
What Is Next? Working Through the Complications
Three major considerations flow from the disconnect between political aspirations and economic realities with implications for mid- and long-term outlooks. Each consideration must be reconciled in any forward view of metals and materials.
Commodities Prices and Market Outlooks
Forecasting is an inexact science, and forecasting commodity prices accurately has long been recognized to be near impossible. As seen in Figure 2, the swings in oil price over the last 10 years pale in comparison to movements in metals prices. If the past is an indicator of the future, this suggests forecasting metals prices will be fraught with uncertainty. To make matters even more difficult, since the collapse of the U.S. mining industry in the mid-1980s, much domestic metals trading and market analysis expertise has evaporated. In turn, the capabilities to sufficiently assess metals markets in order to evaluate market trends and investment opportunities, much less to regulate those same markets, have grown thin. This lack of depth leaves little ability to understand the wide variety of risks and uncertainties that pervade any outlook.
Few energy outlooks incorporate forward price signals other than oil and natural gas, and none accommodate the complex dynamics around metals’ and nonfuel materials’ supply-demand balances. Longer term outlooks are especially complicated given the range of possibilities for battery designs and chemistries, the enormous cones of uncertainty around electric power generation, transmission and distribution, the availability of recharging for an increasingly electrified transportation sector, and the huge uncertainties around the pace and timing of legacy vehicle fleet turnover.
To be clear, long-term outlooks are very cloudy when it comes to the pace of adoption of new technologies and their impact on the energy mix, and this is before considering the usual vagaries in GDP growth, population growth, and the evolution of regional manufacturing and international trade. All of that stated, the pace of energy transitions will very likely be set by the availability of critical minerals and metals. But it is a two-way street: A lack of clear market signals impedes raw materials investments — minerals, metals, chemicals, and more — while constraints in raw materials availability impedes manufacturing and deployment.
Carbon and Carbon Materials
The world needs carbon, the basic building block of life. The bulk of intermediate and final materials are derivatives of hydrocarbon molecules.[15] Delivering those materials in cost-effective ways without hydrocarbons as a raw material input is a mystery yet to be solved.[16] This conundrum is a distinct problem for outlooks in general. Carbon materials are a critical part of new energy technologies — from plastics to composites to resins to lubricants to semiconductors. Any assumption that carbon materials can be removed from the picture biases against sustaining investment in producing carbon-based materials required for new energy technologies while imposing risks to energy supply-demand balances overall.
In the years ahead, advancements in developing new carbon materials, such as carbon nanotube (CNT) fibers, holds the potential to compete in metals applications.[17] Given the significant research being conducted to find cost-effective approaches for generating high value carbon-based materials from hydrocarbon feedstocks, in which hydrogen also is an output, this space bears close watching.[18] In fact, a very good question is: Should more focus be placed on carbon materials solutions, especially given the robust carbon assets in the U.S.?
Politics and Policy
The next 12 to 18 months will do much to reveal sensitivities as corporate capital spending strategies are stress tested.[19] Inflation following the COVID-19 pandemic has done much to uncover interest rate dependencies in the clean energy technology sectors, along with mining and specialty materials. It also heightened growing concerns about government fiscal deficits and debts, as the U.S. IRA and other manufacturing subsidies are piled on top of pandemic recovery spending. The ultimate governor affecting the pace and timing of materials-dependent energy transition policies is likely to be the politics of government budgets and — in the U.S. and Europe — the appetite for growing dependence on China-dominated supply chains for wind, solar, batteries, and BEVs.
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Notes
[1] The White House, “Fact Sheet: The Bipartisan Infrastructure Deal,” November 6, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/06/fact-sheet-the-bipartisan-infrastructure-deal/; The White House, “Inflation Reduction Act Guidebook,” last modified September 21, 2023, https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/; The White House, “FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China,” August 9, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/; IRS, “Credits and Deductions under the Inflation Reduction Act of 2022,” https://www.irs.gov/credits-and-deductions-under-the-inflation-reduction-act-of-2022; and United States Environmental Protection Agency, “Final Rule: Greenhouse Gas Emissions Standards for Heavy-Duty Vehicles — Phase 3,” last modified June 17, 2024, https://www.epa.gov/regulations-emissions-vehicles-and-engines/final-rule-greenhouse-gas-emissions-standards-heavy-duty.
[2] While ignorance can often be attributed to a lack of education, research suggests that willful ignorance can be a choice motivated by a desired outcome (Linh Vu and Margarita Leib, “Why Some People Choose Not to Know,” opinion, Scientific American, December 11, 2023, https://www.scientificamerican.com/article/why-some-people-choose-not-to-know/).
[3] This is noted, among other places, in Oliviero Bernardini and Riccardo Galli, “Dematerialization: Long-Term Trends in the Intensity of Use of Materials and Energy,” Futures 25, no. 4 (May 1993): 431–48, https://doi.org/10.1016/0016-3287(93)90005-E; and Kenneth B. Medlock III and Ronald Soligo, “Economic Development and End-Use Energy Demand,” The Energy Journal 22, no. 2 (April 2001): 77–105, https://doi.org/10.5547/ISSN0195-6574-EJ-Vol22-No2-4. For tables comparing energy output across various generation technologies, see Michelle Michot Foss, “Minerals and Materials for Energy: We Need to Change Thinking” (Houston: Rice University’s Baker Institute for Public Policy, January 24, 2021), https://doi.org/10.25613/qw8k-zn61; Gabriel Collins and Foss, “The Global Energy: Transition’s Looming Valley of Death” (Houston: Rice University’s Baker Institute for Public Policy, January 27, 2022), https://doi.org/10.25613/Y18Q-PM32; and Foss, “Mining, Minerals, and Materials in the Age of Sustainability and Alliances” (Houston: Rice University’s Baker Institute for Public Policy, February 8, 2024), https://www.bakerinstitute.org/research/mining-minerals-and-materials-age-sustainability-and-alliances. Very large installed capacities are needed to generate equivalent units of electric power from wind and solar relative to coal, natural gas, and nuclear. The very large deviations between energy density and specific energy in gasoline and diesel, and that inherent in top-of-the-line lithium-ion batteries underlies range anxiety for electric vehicles. Political risks flow accordingly.
[4] The research base supporting this conclusion is expanding. See Robert Idel, “Levelized Full System Costs of Electricity,” Energy 259 (November 2022), https://doi.org/10.1016/j.energy.2022.124905; Peter R. Hartley, Medlock, and Shih Yu (Elsie) Hung, “ERCOT and the Future of Electric Reliability in Texas” (Houston: Rice University’s Baker Institute for Public Policy, February 7, 2024), https://doi.org/10.25613/EP4G-KW61; Gürcan Gülen et al., Competitiveness of Renewable-Generation Sources, The University of Texas at Austin’s Bureau of Economic Geology, Center for Energy Economics, 2018, https://bit.ly/3Xb44Bi; and Gülen, Net Social Cost of Electricity: Policy Smog and Waning Competitive Markets, Lack of Consumer Participation, Importance of the Grid, and Scalability Challenge, The University of Texas at Austin’s Bureau of Economic Geology, Udden Series 7, 2019, https://doi.org/10.23867/US0007D.
[5] Currently, wind, solar, and batteries for stationary energy storage and mobility constitute roughly 10–30% of metals demand, depending upon the metal. The share is much higher for lithium, at around 60–70%. Most outlooks that incorporate net-zero targets put increases in demand for these metals at double or more current use. For example, see the International Energy Agency (IEA), Global Critical Minerals Outlook, 2024, https://www.iea.org/reports/global-critical-minerals-outlook-2024/outlook-for-key-minerals.
[6] See Foss, “Mining, Minerals, and Materials.” For a broader view of sustainability, see Rachel A. Meidl and Medlock, “The Pride and Prejudice of Sustainability: Rethinking Sustainability from a Systems Perspective” (Houston: Rice University’s Baker Institute for Public Policy, November 8, 2023), https://doi.org/10.25613/20CH-3Z48.
[7] See, for example, Simon Evans, “Analysis: World Has Already Passed ‘Peak Oil,’ BP Figures Reveal,” CarbonBrief, September 15, 2020, https://www.carbonbrief.org/analysis-world-has-already-passed-peak-oil-bp-figures-reveal/.
[8] Foss, “Building a Clean Energy Future Means Securing Vital Minerals Today,” opinion, The Hill, July 28, 2022, https://thehill.com/opinion/energy-environment/3577676-building-a-clean-energy-future-means-securing-vital-minerals-today/.
[9] Several analyses examine aboveground mining risk in these regions. See, for example, Gavin Strong, “In Latin America, Risks Offset Rewards for Mining Sector,” Control Risks, June 27, 2022, https://www.controlrisks.com/our-thinking/insights/in-latin-america-risks-offset-rewards-for-mining-sector-amid-high-commodity-prices; and Vincent Rouget, “Political Risks in Africa’s Top 8 Mining Markets,” Controls Risks, January 30, 2023, https://www.controlrisks.com/our-thinking/insights/political-risk-issues-to-watch-in-africa-top-8-mining-markets.
[10] See, for example, Jennifer McDermott et al., “Offshore Wind Projects Face Economic Storm. Cancellations Jeopardize Biden Clean Energy Goals,” Associated Press, last modified November 4, 2023, https://apnews.com/article/offshore-wind-orsted-cancellation-biden-new-jersey-3f2ff7c9832210ce862f6e7179fae439; and Camila Domonoske, “EVs Won Over Early Adopters, But Mainstream Buyers Aren’t along for the Ride Yet,” National Public Radio (NPR), February 7, 2024, https://www.npr.org/2024/02/07/1227707306/ev-electric-vehicles-sales-2024.
[11] This was a persistent view at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto, March 3–6, 2024.
[12] A robust literature in economics and business exists on the various implications of lumpy capital investment, ranging from impacts on price volatility to monetary policy to investment. Lumpy investment is characterized as such because the targets are typically large and not divisible. Projects that have large lead times, require significant capital outlay, and cannot be scrapped into parts for cost recovery tend to fit this definition. Lumpy investments include energy and mining assets, such as power generation facilities, refineries, mines and metals processing as smelting and refining, and so on.
[13] Meidl, Foss, and Ju Li, “Waste Management of Alternative Energy Supply Chains” (Houston: Rice University’s Baker Institute for Public Policy, March 2, 2022), https://doi.org/10.25613/BB1T-4K23.
[14] For a case study on how it all happens, see Foss and Jacob Koelsch, “Need Nickle? How Electrifying Transport and Chinese Investment Are Playing Out in the Indonesian Archipelago” (Houston: Rice University’s Baker Institute for Public Policy, April 11, 2022), https://doi.org/10.25613/30S0-Y623.
[15] Foss, “The ‘Criticality’ of Minerals for Energy Transitions. Hydrocarbons? Yes, Hydrocarbons” (Houston: Rice University’s Baker Institute for Public Policy, February 8, 2021), https://www.bakerinstitute.org/research/the-criticality-of-minerals-for-energy-transitions-hydrocarbons-yes-hydrocarbons. For another version of this publication, see Foss, “How Fossil Fuels, Ironically, Are Critical in the Development of Renewable Energy Sources,” Forbes, February 8, 2021, https://www.forbes.com/sites/thebakersinstitute/2021/02/08/the-criticality-of-minerals-for-energy-transitions-hydrocarbons-yes-hydrocarbons/?sh=256a5d89140d. Meidl, “Schrödinger’s Cat Paradox: Carbon Is the Enemy. Carbon Is Not the Enemy,” (Houston: Rice University’s Baker Institute for Public Policy, August 9, 2023), https://doi.org/10.25613/5ED9-S212.
[16] No net-zero outlook scenario fully incorporates oil and gas value chain financial balances with losses in revenue from fuels sales.
[17] On circular carbon and carbon nanotube (CNT), see Dana Goerzen, Daniel A. Heller, and Meidl, “Balancing Safety and Innovation: Shaping Responsible Carbon Nanotube Policy” (Houston: Rice University’s Baker Institute for Public Policy, February 28, 2024), https://doi.org/10.25613/PV4W-V980.
[18] See, for example, Carbon Hub, Rice University, https://carbonhub.rice.edu/. CES is operating two projects for Rice Carbon Hub, one of which is focused on metals displacement by CNT.
[19] Foss, 2024, “Can ‘Policy Push’ Industries Survive When Profitability Is Aspirational?,” LinkedIn post, March 2024, https://www.linkedin.com/feed/update/urn:li:activity:7177073859823640576/.
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