Market Transparency Will Unlock Investment in Critical Minerals

By Rob Strayer

China’s dominance of critical mineral supply chains has become a well-known threat to U.S. national security, economic competitiveness, and long-term strategic objectives. 

While this threat only became prominent in the last few years, it is part of multi-decade underinvestment in resilient critical mineral mining and processing by U.S. and partner nation companies. In contrast, Chinese companies have benefited from a combination of government subsidies, vertical integration, and lax regulations. They now dominate processing capacity in particular, which is low margin and highly dependent on the cost of energy and environmental compliance.

One of the biggest hurdles to U.S. companies increasing their investments in critical minerals is the unusually high uncertainty of both production costs and minerals prices. Uncertainty has a chilling effect on new investment by profit-seeking companies, as investors prefer to make investments in projects with higher risk-adjusted expected profits. 

Uncertainty about costs and prices for minerals reflects what might be best described as a “market failure”. It is a market failure in that uncertainty results in an excessive perception of risk that discounts the value of returns from a project and an inefficiently low level of investment. 

This uncertainty is generated by several features of the critical minerals information environment. First, for many critical minerals, a single country’s companies function as a cartel and manipulate the supply made available to buyers and thereby set the price. Thus, the price observed in transactions is not tied to the actual cost of production that occurs in markets that are functioning normally.

Second, estimating production costs for critical minerals is difficult. Significant geographic variations exist in extraction costs, likely yields, grades, and environmental and labor standards for production. This data opacity challenge is exacerbated by a lack of common governmental and investor reporting standards for mining projects and strong incentives for firms to exaggerate potential profit and minimize costs in data shared with others.

Third, predicting demand for critical minerals is difficult because of rapid technological innovation and the oversized role of governments in driving demand. As an example, if history is a guide, the components of next generation batteries may be very different in the 15 years it takes an average new mining project to become operational. Furthermore, for many critical minerals, governments generate demand with policy actions that create incentives and acquisition of military systems, which adds volatility to demand projections. 

The impact of this information market failure is compounded by the Chinese government’s active role in financing and directing the activities of its firms in this domain. The recent plummeting of several critical mineral prices has forced many mining operations to look for capital infusions, and Chinese companies have used their lower capital costs and state subsidies to further control and cement their predatory market position across the globe. 

U.S. firms are legally responsible for maximizing shareholder value on a quarterly basis. On the other hand, Chinese companies are not primarily focused on maximizing short- and medium-term returns, and their state backing allows them to prioritize autonomous control of vertically integrated supply chains over profit. 

While China’s approach of direct subsidies and other assistance offers one way to overcome investment hurdles, an alternative and potentially far more efficient approach is to reduce uncertainty by closing the information gaps described above. Closing this information gap will require an unprecedented public-private collaboration. While there are a multitude of ongoing government and private sector activities focused on critical minerals, there does not yet exist a collaborative effort focused on addressing this information market failure.

To be successful, a private-public collaboration must provide better price, supply, and demand information. On the supply side, it must aggregate data on costs and supply from multiple commercial actors. Advanced data analytics can provide a more nuanced understanding of the structural factors underlying the cost of production and be used to predict the price.

On the demand side, it must be able to aggregate data from the manufacturers who use critical minerals in a wide range of products. For potential miners, refiners and investors, there is tremendous value in more accurately projecting demand for minerals. And manufacturers benefit from understanding how aggregate demand intersects with the supply curve and how this will impact price. 

At the heart of such a data-centric collaboration is transparency about the data and predictive models. Investors need to assess the confidence that they can place in models and the factors influencing their price, supply, and demand projections. 

This private-public collaboration can be achieved through a dedicated forum that will function as a trusted partner to both aggregate proprietary data and facilitate shared access to the best-available analytic capabilities. The Defense Advanced Research Projects Agency (DARPA) has established a project to produce superior data analytics, called the Open Price Exploration for National Security, with the Critical Minerals Forum serving as the collaborative mechanism for engaging the private sector. 

We should not accept the current state of opaque pricing for critical minerals, which leads to suboptimal levels of investment and diversification of supply chains. Transparent data about cost and price along with more confidence in supply and demand predictions can enable new levels of investment in reliable supply chains.