Inflation Reduction Act may lead to major metals supply crunch
A metals shortage is coming—this is a message that has been ringing out for at least a year now from mining and commodity trading executives and analysts alike. It seems, though, that it has not really been heard in the EU or the United States.
Both are making a huge bet on said transition. Both are aware that it is impossible without a lot more metals and minerals than currently used globally. And both are going about securing these metals and minerals by tightening the pool of available sources through what’s being called in political circles friend-shoring.
The situation is particularly acute in the United States, where the Inflation Reduction Act has spurred a veritable race to secure the raw materials for the transition to wind, solar, EVs, and green hydrogen. With several hundred billion in subsidies, miners are happy to oblige. Up to a point.
In a recent report, S&P Global found that the mining industry will encounter “considerable challenges” in securing the metals necessary for the transition to net zero emissions.
The report noted factors such as the stipulation regarding friend-shoring, which means sourcing metals from U.S. free trade partners or within the U.S. itself while banning metals from Russia, China, Iran, and other “foreign entities of concern” in 2025.
That stipulation basically makes an already present problem of short supply even more serious. The United States certainly has free trade partners it could use to source, for instance, copper or lithium. However, local mining, which is widely seen as the most secure supply source possible, is hampered by environmental regulations.
“The energy transition is really heating up the pressures on mineral supplies, and the IRA is adding a lot to those challenges,” S&P Global’s vice chairman Daniel Yergin said in comments on the report, as quoted by Reuters.
The Biden administration, meanwhile, recently killed a copper and nickel mining project in its infancy by revoking its permit. The reason: “the permit did not comply with the water quality standards set by a sovereign downstream tribe, the Fond du Lac Band of Lake Superior Chippewa.”
A year earlier, before the IRA was passed, the administration also killed a mining project for copper, nickel, and cobalt. This time the Interior Department cited concern about a protected area near the mine and withdrew said area from mining consideration for 20 years.
A lithium mine proposed for Nevada, meanwhile, has been shelved because of massive environmentalist opposition. The activists claimed the mine would harm a rare species of buckwheat and insisted that the species be listed as endangered, which the administration agreed to do.
It seems, then, that the Biden administration is trying to facilitate local metals production with one hand while cutting it short at every corner with the other. That means almost exclusive reliance on imports, and this is never a good idea.
Certainly, partner and ally nations such as Canada and Australia are unlikely to change their geopolitical priorities in a way that would turn them against the U.S., but some of the biggest producers of key transition metals and minerals are a whole other matter.
Indonesia, for instance, a while ago proposed the creation of an OPEC equivalent for transition metals. The largest producer of nickel in the world, in other words, signaled it would quite like to have a greater say about the price of the transition metal, as well as those of cobalt and manganese, which Indonesia also produces in considerable volumes.
Incidentally, the S&P Global report specifically mentioned nickel and cobalt as threatened by supply shortages in the near future. Besides Indonesia, other significant nickel producers, unfortunately for the U.S., include China and Russia. Fortunately, the top 10 list also features Canada and Australia.
Even so, the supply of metals and minerals critical for the transition remains highly uncertain, even in the friendliest of U.S.-friendly jurisdictions. Because of stringent environmental regulations of the sort that the U.S. itself enforces at home. And because opening a new mine takes not only money—which can be made available with IRA support—but also time.
The S&P Global report, like so many before it, suggests that government support, including direct financial support in the form of subsidies, will spur a lot of demand for metals and minerals. There will be so much demand, in fact, that suppliers will be physically incapable of responding in a timely manner.
McKinsey earlier this year put the gap at 10-20% for nickel by 2030 and a whopping 70% for a rare earth metal called dysprosium, which is used in electric motors. All because of the rush to electrify and lower emissions.
In other words, those jumpstarting the transition with massive subsidy packages are essentially dooming that same transition by creating levels of demand they have no realistic way of meeting.
