5 steps to scale up critical raw materials using a 'thick markets' approach

Many Western governments frame policy towards critical raw materials in terms of security of supply and fret about "dependency" on hostile nations. Governments of nations with lots of material reserves see matters differently. For them, surges in demand for these materials in the decades ahead – brought about by energy and digital transitions – is too good an opportunity to miss to develop extraction and processing industries.

Both groups frequently talk past each other, made worse by suspicions intensified by geopolitical rivalry. More and more governments are taking action following the publication of lists of “critical raw materials” (see map below). The ensuing scramble for critical raw materials was the subject of the recently-published 31^st Global Trade Alert report, which we co-authored.

Even in the absence of geopolitical rivalry, the challenges associated with scaling up supply of raw and processed critical raw materials would have been formidable. Fundamental uncertainty over the pace of digital and energy transitions discourages investment in raw materials extraction and processing, compromising the fight against climate change.

On top of this are geological considerations, including the fact that some critical raw materials are byproducts of other less-wanted materials and that long timeframes are needed to bring certain mining facilities online. Further, financing difficulties and permitting delays slow scale up. Action is needed now to prevent emerging choke points.

In this report we recommend that policy-makers thicken markets precisely because, as the global market for wheat demonstrated last year, an open, transparent and competitive market with a range of suppliers worldwide is capable of absorbing unanticipated supply disruptions. Market structures are not set in stone, and thin markets are the outcome of prevailing private sector incentives, including coordination failures.

Adopting the principles of the thick markets approach offers a practical way to turn the current narrative of de-risking into a meaningful work programme. Moreover, central to a thick market approach is fostering viable long-term suppliers – which ought to appeal to those governments keen on making the most of their nation’s material bounty.

Five steps must be taken when implementing a thick markets approach capable of meeting the rising long-term demand for critical raw materials.

Not every raw or processed industrial material faces security of supply concerns or likely shortages. Nor can the profit margins at the extraction and processing stage of every industrial material support viable business cases. Governments need logic and evidence-based approaches to determine which raw materials to single out as “critical,” “strategic,” etc. Technocratic assessment of these markets, attendant risks, the track records of suppliers, the potential for substitution, recycling, and other relevant factors is required. Claims that a raw material is special should be scrutinised in processes shielded as much as possible from lobbying and political interference. Following an evidence-based Rule of Reason approach is likely to lead to a relatively small number of potentially very important raw materials being singled out for special treatment by governments.

The goal ultimately is to persuade commercial actors upstream and downstream to expand production capacity. In many cases this involves making huge financial outlays with very long payback periods, sometimes reflecting lengthy times-to-market. This is not a new problem. But it is one that needs tackling now. Policy measures should seek to reduce revenue uncertainty (better accomplished by committing to minimum purchase prices rather than commitments to buy fixed quantities of raw material), taking steps to maximise the total addressable market (ideally by the economies with the largest buying power for raw materials aligning on steps that keep markets open), reducing the amount of capital commercial actors must tie up in a mining or downstream activity, and reducing the risk faced by lenders to commercial actors operating in critical raw material markets (through partial loan guarantees that mean lenders still have enough skin in the game).

We show in this report that both private and public sector acts can reduce the amounts of a raw material available for sale on the international market. Thinning upstream markets for raw materials is particularly pernicious as it can also thin the market for downstream processed materials. Eschewing steps to thin markets will affect the conduct of policies towards exports, competition law and its enforcement (in respect of vertical mergers and restraints), and development policy (in relation to offtake agreements associated with specific transactions).

The potential for unanticipated demand surges and occasional supply lapses, combined with the slow and potentially faltering expansion in upstream and downstream production capacity for raw materials, means that market disruption will occur from time to time. Even if a thick markets approach is being pursued faithfully, the history of materials markets points to bouts of market turbulence. Where technically possible and viable, governments should establish incentives for the commercial buyers of raw materials to create stockpiles.

The challenges before governments – namely, expanding the supply of raw materials necessary to slow down or halt the rise of global temperatures and to capitalise on the digital transformations of our societies – are long-term in nature. Commercial enterprises need to be induced to make major investments in a sustained fashion for years to come. Expecting that to happen when policy is driven by narrative based on suspicion is naïve. Uncertainty is the enemy of long-term investment.

Of course, governments will compete and tensions between states will break out from time to time. But clashes should be reserved for cases when foul play can actually be established. When it comes to critical raw materials, as we describe in the report, this requires a radical revision in the approach taken to transparency both of policy intervention and corporate ownership.