## FRAGMENTATION OF CRITICAL MINERAL MARKETS WOULD SLOW THE SHIFT TO CLEAN ENERGY

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### Rising demand for critical minerals
- The International Energy Agency predicts demand by 2030 will need to grow by a factor of 1.5 for copper, for nickel and cobalt to double, and for lithium to increase six times.
- New trade restrictions in commodity markets more broadly have doubled since Russia’s invasion of Ukraine.
- Critical minerals are used in EVs, batteries and wiring, and renewable-energy technologies such as solar panels and wind turbines.
- A typical EV battery pack needs about 8 kilograms of lithium, 35 kilograms of nickel, and 14 kilograms of cobalt.
- Charging stations require substantial amounts of copper.
- Minerals are often hard to substitute and mining production can be difficult to relocate; supply responds slowly to price increases.

### Extreme vulnerability
- Two-thirds of the world’s cobalt is mined in the Democratic Republic of the Congo.
- The top three producers of nickel and lithium control more than 60 percent of supply.
- The combination of concentrated supply and widespread demand has led to extensive commodity trading and heavy import reliance by many countries.
- The trifecta of high concentration of production and low reactivity of supply and demand makes critical minerals for the energy transition highly vulnerable to trade restrictions.

### Transition delay (IMF researchers’ fragmentation scenario)
- IMF researchers divided markets for copper, nickel, lithium, and cobalt into two hypothetical blocs that refuse to trade with each other, along the lines of a 2022 UN vote on Ukraine.
- The inability of the hypothetical China-Russia+ bloc to import these minerals from mining countries such as Chile, the Democratic Republic of the Congo, and Indonesia would lead to an additional price increase of 300 percent, on average.
- Higher mineral acquisition costs would lead to lower investment in solar panels and wind turbines and fewer EVs.
- In the hypothetical US-Europe+ bloc, fragmentation would cause an oversupply of most mined minerals, but use would be constrained by the time needed to scale up refining capacity.
- By 2030 fragmentation generates only small gains in the US-Europe+ bloc: slightly more EVs but no gains in renewable-energy capacity.
- On balance, global net investment in renewable technology and production of EVs would be about 30 percent lower, if greenhouse gas emissions are used as weights to aggregate region-specific results (this accounts for the greater emissions intensity of activity in the China-Russia+ bloc).

### International initiatives and policy recommendations
- Multilateral cooperation is essential to prevent vicious spirals of trade restrictions used as risk management tools.
- An agreement on enhanced World Trade Organization rules on export restrictions and tariffs as well as discriminatory subsidies would be the best solution.
- If full cooperation is impossible, prioritize establishing a “green corridor”: at minimum, agreement to maintain the free flow of critical minerals and not to discriminate between firms from different countries.
- Create an international initiative to improve data sharing and standardization in mineral markets to reduce market uncertainty.
- Establish an institution or platform focused solely on critical minerals, similar to the International Energy Agency or the Food and Agriculture Organization.

### Actions for individual countries and industrial policy design
- Diversify sources of commodity supplies.
- Invest in mining, exploration, and storage.
- Expand critical mineral recycling.
- Design industrial policies to ensure equal treatment of firms across competitive markets to prevent adverse cross-country spillovers, minimize distortions and inefficiencies, and mitigate fiscal risks and harmful political economy outcomes.
- Be cautious with “friend-shoring” policies and local-content provisions, which can distort markets and raise costs; develop a framework for international consultation on friend-shoring to identify negative cross-border spillovers and mitigate adverse consequences.

*Christopher Evans (IMF Western Hemisphere Department), Marika Santoro (IMF Strategy, Policy, and Review Department), and Martin Stuermer (IMF Research Department); F&D, December 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/december/62-65-stuermer-final.pdf_