Built on Rocks: The Economics of Critical Minerals

“Almost every part of modern daily life relies on minerals, often mined thousands of miles away … modern society is quite literally built on rocks.” (1)

 

What do iPhones, TV screens and light bulbs have in common? Of course, they’re three of the many items we cannot live without, but they also share a common input — rare earth elements. These are only some of the several minerals identified by the UK as “critical” due to their economic importance and supply risk (2). And though such a market may seem esoteric at first, the massive array of products that depend on it make it a fundamental necessity in the modern world. 

 

Moreover,critical minerals are also vital for other markets expected to grow in the future, particularly clean energy. For example, lithium is a vital input in solar panels, electric vehicle batteries, and magnets for wind turbines (3), making them important for industries looking to reduce their greenhouse gas emissions and clean their energy supply. 

 

Crucially, critical minerals themselves are non-renewable, as their reserves are finite, which makes their use inherently unsustainable. However, their supply is still plentiful compared to fossil fuels: at current consumption levels and excluding undiscovered reserves, we have approximately 50 years of oil and 53 years of natural gas reserves left (4). On the other hand, we have 70 years of lithium reserves left, even considering its increased consumption due to electric vehicles (5). Only coal, unequivocally the ‘dirtiest’ fossil fuel in terms of CO2 emissions (6), tops lithium with over 100 years of reserves left (4). 

 

Our knowledge of mineral reserves, however, is anything but rock solid. Critical minerals are often by-products of the extraction of other metals. For example, cadmium — used in solar panels and rechargeable batteries — is retrieved primarily from zinc ores (7). As such, the volume of cadmium reserves is inherently a function of zinc reserves, introducing a layer of economic uncertainty. This is because the price fluctuations of the primary metal significantly influence the production level of the by-product, leading to volatile market dynamics. 

 

Moreover, there is an important distinction to make between mineral reserves and mineral resources: resources refer to all the minerals in the ground, but reserves are only those resources which can be extracted and exploited for economic benefit (8). So, if mineral resources exist in locations where indigenous tribes are present, or if extracting these resources is unprofitable, then they will not count as reserves. This additional criterion makes our estimation of mineral reserves, and therefore any policymaking regarding them, trickier. 

 

A further issue for policymakers is the concentration of global production. China alone produces well over half of the world’s graphite (9) and lithium-refining capacity (10). This lack of diversification may prove problematic for other countries, especially those dependent on China for their mineral supply. For instance, the US — which gets over 40% of its graphite supply from China (9) — may experience a critical mineral shortage if China were to tighten the taps and restrict trade. This is worrying for US policymakers, against the backdrop of worsening relations between the two countries. 

 

Additionally, the globalised nature of supply chains adds further complexities. Take cobalt: half of the world’s reserves are in the Democratic Republic of the Congo (11) but 72% of these are owned by China (12). Once mined, much of this cobalt is refined back in China, which also uses it in final products like rechargeable batteries, giving it a stronghold in 3 industries through vertical integration. Other than China, Finland is also a major refiner of cobalt (13), whilst USA and Poland each produce over 5% of the world’s rechargeable batteries (14). The UK — which depends on rechargeable batteries for vital goods like phones and laptops — must navigate a highly concentrated global market and track numerous suppliers across different countries. Even small shifts in trade restrictions or geopolitics can be seismic for such supply chains, leaving importers like the UK in a constant state of uncertainty. 

 

With net zero goals becoming a political must-have for many countries, promoting clean energy becomes a priority, and critical minerals become all the more, well, critical, since these are essential components in many of today's rapidly growing clean energy technologies. Given this, high concentration in the global strategic mineral market likely results in overdependence on – and therefore potentially binding relationships with – a few powerful suppliers. If not this, then a probable shortage of these minerals will weaken tech and energy industries, leading to compromises in living standards. So, how can the UK tackle this issue in the short term? It seems that the security of critical mineral supply boils down to diversifying global production: if a country can import from several sources, disruption with one of them becomes a smaller issue. 

 

It is, then, in the UK’s best interest to facilitate this diversification by shifting production away from leading producers. If the government assesses that, for instance, Canada has the potential for large-scale mineral extraction, it can facilitate mineral purchase contracts between British and Canadian companies. Such policies increase market entry as long-term commitments reduce exposure to uncertain and volatile prices. This can ultimately help maintain a stable supply of key resources for the UK and foster competition in global mineral markets. 

 

However, even with such trade deals, mineral-rich countries will still need to juggle their other, perhaps larger buyers. Political allies like Australia cannot guarantee a sufficient supply of minerals to the UK either, especially when China is its most important buyer — it is the quintessential economic dead end: too many wants, too little resources. Limitations in trade as well as the non-renewable nature of the industry mean that critical mineral supply will always be fragile, but that just means a sharp focus on the market is more important than ever.