A critical challenge: Market for critical minerals faces geographic concentration, information asymmetry

By Somit Dasgupta

With the accent on decarbonisation, critical minerals and rare earths have taken centre stage. In fact, without the availability of critical minerals, decarbonisation is surely going to come to a halt. Critical minerals are required in the manufacture of batteries, solar cells, wind turbines, fertilisers, consumer electronics, defence equipment and many more.

There is no accepted definition of critical minerals and it is for each country to define as to what they consider to be critical. For instance, India has identified 30 minerals as critical, the USA has identified 50, Japan has identified 31, the UK has identified 18, and so on. In a way, criticality is dynamic.

A mineral not considered critical today may turn critical tomorrow and vice-versa depending on the ease of its availability and importance. In contrast to critical minerals, rare earths are a defined lot and have a specific place in the periodic table.

Why is there so much of talk about critical minerals? It’s because these minerals are concentrated in a few countries. For example, Australia has 55% of the lithium reserves, China has 60% of the rare earths, the Democratic Republic of Congo (DRC) has 75% of cobalt, Indonesia has 35% of nickel, and Chile has 30% of copper reserves, etc.

When it comes to processing, matters get worse since China processes 35% of the world’s nickel, 50% to 70% of the lithium and cobalt, and nearly 90% of the rare earths. Not just that, China has also monopolised the manufacture of finished products as it supplies 78% of the cathodes, 85% of the anodes, 70% of the battery cells, and 95% of the permanent magnets made from rare earths.

The world community may not relish the idea that China holds the key but one cannot ignore the fact that China has always been a meticulous planner and had the foresight to see how important critical minerals will become in the years to come. In the early 1990s, the USA was happy to export its mined minerals to China since labour was cheaper there and also because processing critical minerals is energy-intensive and gives rise to carbon emissions.

This is not to suggest that the US is conscious about its carbon footprint. Let’s not forget that cumulatively the US is the biggest emitter (25% of the world’s emissions) but when it comes to taking responsibility, its response is pathetic. How else can one explain the USA’s paltry contribution of $17.5 million, out of a total global commitment of $800 million, towards the Loss and Damage fund that was operationalised during COP28 in 2023.

The dominance of China in the field of critical minerals has led to the formation of the Minerals Security Partnership (MSP), almost as a knee-jerk reaction. India too is a member of the MSP whose primary objective is to is to ensure a steady supply of critical minerals.

Whether the MSP will be successful in its objective only time will tell considering the fact that many countries, which are rich in critical minerals, are not members of the partnership. Examples are Chile, DRC, and Indonesia.

The International Energy Agency (IEA), in a report published this year, has said that there was a massive fall in prices of critical minerals in 2023 after a sharp rise in prices in the previous two years. The fall in prices is especially stark in the case of the minerals that are used in batteries, such as lithium, graphite, nickel, cobalt, and manganese. It’s not that the demand has been falling, in fact it has been constantly increasing.

To give an example, the demand for lithium has grown by about 30% due to electric vehicles. The IEA estimates that mineral demand for clean energy technologies will double between now and 2030. The fall in prices are actually on account of oversupply. The fall in prices of critical mineral is both good and bad. It is good because the price of end products like batteries has come down, but the downward spiral in prices may adversely affect investments in the sector if the trend continues. It is thus clear that the market for critical minerals not only faces problems of geographic concentration but also information asymmetry.

The investors, it seems, had overestimated the demand and therefore it is crucial that relevant data on renewable capacity growth is publicly available. The IEA has also said that there is going to be considerable shortage in the supply of copper (70%) and lithium (50%), whereas the situation is not so bad when it comes to nickel and cobalt. Graphite and rare earths may not have a problem in supply but will have problems of market concentration.

In fact, it is feared that the geographic concentration is going to get worse. Concentration, however, does not seem so bad if it is viewed in terms of asset ownership, the reason being that US and European companies have been acquiring assets in other countries.

When it comes to India, the path for getting access to critical minerals seems quite arduous. First, India does not have reserves for critical minerals, barring a few. Though we have decided to auction 20 blocks allowing private sector mining, the response is not very encouraging. Some experts feel that the policy is flawed since critical minerals are available in small quantities and thus, standalone mining for critical minerals is not economically viable.

It has to be bundled with some other mineral which is available in large quantities domestically. Besides, just mining the mineral is not enough, it has to be processed and we do not have the requisite technology. Sending the mineral to another country for processing does not ease our woes. We need to collaborate with some leading processors so that the technology is made available to us. It is said that the supply of critical minerals can be enhanced by about 10% through recycling.

This again is a difficult job and requires the use of advanced technology apart from setting standards which need to be adhered to. The gist of the matter is that as things stand today, India’s position in securing a steady stream of critical minerals seems shaky.

The author is a senior visiting fellow at ICRIER.

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