Economy, explained.
Antimony, gallium, germanium, and indium, to name a few, all have very small commercial markets (Getty Images)
With policy design in flux, a five-step plan could drive innovation and private-public cooperation on vital resources.
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How the West can shore up its strategic metals supply chainHow the West can shore up its strategic metals supply chain
It is increasingly clear that stockpiling of strategic metals (defined as metals essential to military applications and/or high-end mixed-use technology) needs to become a major plank of national strategies for military preparedness and mobilisation. China’s dominant position in the processing segment of the value chain of strategic metals is well documented, and its conduct with respect to export controls increases the urgency. Here, the West suffers from an inability to provide the right incentive structures to motivate the required investments to make this current point of weakness a future point of strength. But there is a way through.
In the current geopolitical environment, we cannot wait for the boom to arrive and wake the animal spirits.
First, we need to register that to ensure security of supply in times of conflict, a system needs to invest in capacity that exceeds current or peacetime requirements by a considerable margin. However, one thing that strategic metals tend to have in common is that the commercial market is small, so any large capacity expansions can potentially be very disruptive for the supply-demand balance during peacetime. Antimony, gallium, germanium, and indium, to name a few, all have very small commercial markets. Therefore, any strategy aiming to sponsor the first action (investing in capacity that exceeds current needs) must also account for the fact that this might look like commercial and career suicide from the perspective of a private sector CEO and their board of directors.
Bridging these two realities is not something that China has found all that challenging. In China’s financially repressive system, where credit supply is seen as just another input for priority segments of the real economy, capacity can be mobilised in advance of demand, and Chinese firms can durably absorb the slim returns on offer in over-supplied industries. The West’s capital allocation system, whose ruling deity is Wall Street, has a preference to grudgingly dole out funding to industrial borrowers. High-risk commercial projects (especially uncertain endeavours such as new integrated mine-to-metal facilities, with long-dated paybacks and a wide range of potential profitability) are often left on the shelf without a funder until the peak of the boom temporarily loosens purse strings. In the current geopolitical environment, we cannot wait for the boom to arrive and wake the animal spirits.
You can imagine the conversation between a prospective funder and the proponent of an investment in the strategic metals value chain that includes an explicit allowance for excess capacity to accompany a surge in times of conflict.
So you want to invest in new capacity that will not only crash the market price for who knows how many years, and you will leave half of the capacity that we are paying for idle more often than not, and you’ll also be competing directly with China in the processing segment, and if you turn cash-flow positive in a decade, you’ll fall off your chair in surprise? Thanks, I’m glad we got that clear. Next!
Thankfully, there is a way through without needing to make a dent in the Wall Street-dominated culture that pervades decision-making in the West. In strategic metals, the State can make a major impact. I write those words despite a long-held position of scepticism of the need for State involvement in any endeavour where the private sector has a dominant presence. I recently argued against the need for a Clean Commodity trading Company in Australia, for instance, partly due to the fact it would needlessly shadow private sector activity. The key is to coordinate investment in the strategic metals value chain with sovereign stockpiling efforts, which is essentially a natural monopoly activity. The model is quite simple.
The explicit link drawn between “minerals dominance” and the National Defense Stockpile in the Trump administration’s executive order on “Unleashing American Energy”, highlights that this is a dynamic area where policy design is in flux and there is an opportunity for innovation and the prospect of a fresh start for private-public cooperation on this important issue.
The simple sequence of steps highlighted above offers a potential way through, where a robust position on the security of supply of strategic metals can be achieved in the West despite the impediment presented by Wall Street’s narrow worldview. As a sideline, setting out to create excess capacity for stockpiling purposes has the positive side-effect of increasing economies of scale that would not be available otherwise. That would improve the ability of Western facilities to compete with Chinese operators, who have major scale advantages at present.
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