Commodities in the First Quarter: Inflation, War, and Geopolitics

Goldman Sachs’ 2023 commodity markets outlook had anticipated a substantial return of over 40 per-cent by the end of 2023 for commodities (S&P GSCI TR Index). As the first quarter of 2023 draws to a close, S&P GCSI spot prices closed the quarter at a -2.81 per-cent loss. As was the case in many financial markets, the S&P GCSI saw its biggest decline in the first quarter in the week of Silicon Valley Bank’s collapse – gold being the glaring exception.  Of course, this is by no means indicative of how commodity markets will perform for the remainder of the year. Nevertheless, the impact of the ongoing banking on the inflation-duration investment cycle (elaborated below in Figure 1) for commodities remains to be assessed. This spotlight aims to do precisely that, considering some of the macroeconomic assumptions and models proposed in Goldman Sachs’ 2023 commodity outlook. 

Understanding the Inflation-Duration Investment Cycle

The inflation-duration investment cycle is a tool useful for understanding investment in commodities and commodity market behaviour, relative to inflation and interest rates. It loosely correlates with the Merril Lynch Investment Clock – although it is a bit more specific to commodity markets.

Figure 1 - The Inflation-Duration Investment Cycle. Adapted from Goldman Sachs Commodity Outlook.

When Goldman Sachs published their 2023 Commodity Outlook, they affirmed that at present, the commodity market was still in the first stage of the inflation-duration investment cycle. Crucially, the 2023 Commodity Outlook explains that in addition to the current high-inflation, high-interest rate macroeconomic environment, commodity markets are confined in an underinvestment super cycle such that unless there is a sustained increase in capital expenditure (capex), increasing demand cannot trigger a supply-side response hence creating inflationary pressures in the short-term. The remainder of this spotlight will sum up the overarching macro-level geopolitical supply-side risks impacting three core sectors of the commodities market: agriculture, rare earth minerals, and energy markets. 

Agriculture in Q12023

S&P agriculture indices (GSCI Agriculture, GSCI Livestock, and GSCI Grains) outperformed the S&P GSCI with GSCI Livestock being the best performing index considered in this spotlight, gaining 5.94 per-cent this quarter. Agriculture and Grains lost 0.61 per-cent and 2.57 per-cent, respectively. 

At the macro-level there are two factors that will keep grain prices high, despite losses in value in the first quarter of 2023. These factors are the supply-side issues resulting from the Russo-Ukrainian War, despite the recent extension of the Black Sea Grain Initiative, and climate change – which is already having some impact on grain yields. As hypothesised at the start of the Russo-Ukrainian war, grain prices skyrocketed as the two countries contribute to about half of the world’s grain supplies. The wide use of grain in human and animal diet means that the precarity of grain supply will likely underpin most food-related price rises and contribute significantly to the cost of living crisis, globally. For that reason, the extension of the Black Sea Grain Deal on March 18 was of great relief for the global food supply chain. However, despite the extension there are two items still on the snag list: (i) a disagreement between Moscow and Kyiv over how much longer the Grain Deal will run for, and (ii) Russia banning major grain exporter – Cargill – from exporting Russian grain, which has already impacted futures’ prices. 

Short-term risks impacting the supply of agricultural commodities also consist of grain supply, as they are crucial for animal feed. In addition to this, avian influenza outbreak in poultry supplies, which are not limited to just the United Kingdom, are having impact on related goods. Avian influenza outbreaks have been reported in the United Kingdom, United States, the rest of Europe, and there are fears that avian influenza and eventual egg shortages are also felt in South America. Long-term impacts of zoonotic diseases like avian influenza are difficult to quantify. Notwithstanding, after the outbreak of COVID-19 and the ensuing pandemic, there has been formal research dedicated to the matter which would suggest that countries with highly-industrialized, high-density agricultural industries run a higher risk of having disease outbreaks harm crop and livestock supplies. Thus, balancing land use and industrial density with growing populations’ driving up demand will be of importance if governments want to avoid severe shortages of crucial food items. 

Energy Markets in 2023Q1

The three S&P energy indices considered in this spotlight – GCSI Natural Gas, Global Oil, and Global Clean Energy – all lost value quarter in 2023. Natural gas especially took a substantial hit, losing 44.43 per-cent of its value at the end of trading on March 31. Oil lost a little over five per-cent throughout the opening quarter whereas Global Clean Energy’s losses were below the one per-cent mark. 

The stand out commodity here is natural gas (including LNG) and this is in large part because of the “geopolitical struggle between Europe and Russia” which will play a crucial role in dictating natural gas markets for the foreseeable future. As severe sanctions on Russian oil and gas were confirmed by the European Union throughout 2022, the bloc has not yet dealt with the fact that there is still strong demand and necessity for those commodities. Although some effort by means of REPowerEU have laid the groundwork for a shirt to alternative energy supplies, European countries have begun to look elsewhere for natural gas supplies. One such effort has been made by Italy who has looked to further increase imports of Algerian natural gas. 

Another recent trend has been importing Indian-refined petroleum products derived from Russian oil, despite embargoes. This shows that short-term procurement of oil and gas into Europe could well become economically and politically costly until alternative energy supplies are not secured. As the necessity for reliable energy supplies begin to outweigh the political value of sanctions on Russia, European countries may well find themselves having to prioritise one over the other. A pessimistic outlook that may be, but it is already materialising; as France settled its first LNG deal in Yuan with China. As the BRICS countries begin to trade in their own currencies the return of a multi-polar energy market might lead to less market predictability and prolonged period of macro-scarcity.

On the other hand, the political and economic urgency to expedite the green energy transition is indicative of a positive outlook for renewables markets according to the International Energy Agency’s latest industry overview. Indeed, analysis and forecasts from McKinsey share this sentiment as they expect substantial growth in solar and wind energy. Bloomberg shares this sentiment in the hydrogen sector, too. As legislation and regulation gears itself towards carbon-neutrality in the world’s three largest economies – the United States, China, and the EU – there is a genuine legal basis for optimism in renewables markets. A medium to long-term risk to watch out for, however, would be the political and economic competition over the necessary resources – such as copper – for a green transition.  

Rare Earth Metals in 2023Q1

In the opening quarter of the year, the S&P GCSI Core Battery Metals Index – which tracks stocks of rare earth metals (REM) pertinent to battery production – stagnated around the -0.34 per-cent mark. On the other hand the S&P GCSI Precious Metals Index soared 9.14 per-cent, though this was in large part due to investors backing gold and silver as the United States’ regional banking crisis erupted. 

Although the relationship between geopolitical tensions and short-term supply risks of REMs is not yet at the scale of the relationship between geopolitical tensions and the supply of agricultural and energy commodities, there is reason to believe that this will not last very long. Essentially, this is because REMs and precious metals are crucial to the green energy transition and the production of key electronics’ components like semiconductors. REMs are also becoming ever-more important for the production and maintenance of modern-day defence systems. Thus, securing REM supply chains and secondary materials is a paramount task for states and businesses looking to establish a dominant presence at the international level. As of 2020 REM exports originated overwhelmingly from Asia with Myanmar, China, and Japan accounting for over half of all exports. The United States and its European allies, on the other hand, exported just over 10 per-cent of global REM exports. Furthermore, sanctions against Russia and Myanmar have further complicated access to REM imports for Western business and countries. This is exacerbated further by Beijing’s recent efforts to improve relations with Moscow and Naypyidaw – with the latter being crucial for China’s efforts to overcome the ‘Malacca Dilemma’. 

In recognising this weak spot, both the Biden and Trump administrations took swift action to incentivise the reshoring production of crucial electronics, starting with the National Strategy for Critical and Emerging Technologies as a direct countermeasure to China’s efforts to increase its own electronics production. This was followed up with the CHIPS and Science Act and formal export controls, limiting semiconductors produced with American technology and inputs to China.  In the meantime, the United States has sought to diversify its REM supplies from Africa, where China has a considerable geopolitical presence. What the impact the ongoing China-United States rivalry over REM supplies and semiconductor development will have on prices in the short-term remains to be seen, but the medium-to-long-term protectionism and antagonism between Beijing and Washington will likely lead to REMs enjoying substantial price increases considering their growing demand. 

Summary: Outlook for 2023 and Beyond

The first quarter of 2023 carried forward many of 2022’s geopolitical dynamics and risks into global commodity markets. There have also been supply shocks, like avian influenza outbreaks and severe climate events, which have harmed the supply of crucial commodities that have further exacerbated the impacts of geopolitics on market activity. 

This is particularly visible in agriculture markets where the uncertainty on how long the Black Sea Grain Initiative extension will last is a key risk to secure grain supplies globally. If Russia’s demands for a reduction of sanctions can be made credible by its recent rapprochement with China, then an extension of the Black Sea Grain Initiative beyond the current deadline will likely result from a reduction in Western sanctions. Conversely, if the West can find ways to cope with inflation and diversifying energy supplies, then Moscow might be forced to formally accept a longer extension. The outlook on the matter remains speculative, but the consequences of a no-extension scenario could spell disaster for global food supplies within the next quarter.

Although energy and REM markets are also mired by geopolitical power struggles and risks, the potential for a drastic spillover into commodity markets and the wider economy in the short-term is, at this stage, quite limited. Although, as REMs become more intertwined and necessary for future energy markets this outlook will likely change post-2023. This is because in the absence of short-term flashpoints, the increasing pursuance of protectionist and antagonising trade policies between Beijing and Washington will very likely undo much of the economic globalisation that occurred pre-COVID. 

Hence, it is not likely that global commodity markets will break the macro-scarcity phase of the Inflation-Duration Investment Cycle in 2023 – and potentially prolong the under investment in commodities into 2024 and beyond. However, there is still a lot of 2023 to go and there is a lot of time for pressing issues to unfold and provide a clearer picture for commodity markets. Although, the current direction of the international regulatory and political environment does not offer much optimism for the long-term, with regards to increasing capex or securing crucial supply chains.

Cover photo credits to: Black Sea Grain Initiative FAQ | United Nations in Namibia

Lithium in Iran: Iranian Gold is Black & White

Iran's Ministry of Industry, Mine, and Trade has declared that a significant discovery of 8.5 million tonnes of lithium has been made in Qahavand, Hamadan. The discovery puts Iran in possession of the largest lithium reserve outside of South America. Furthermore, the Ministry has indicated that there could be even more significant amounts of lithium to be discovered in Hamadan in the future. These developments position Iran to potentially overtake Australia as the top supplier of lithium in the world, although it will be heavily reliant on Iran's diplomatic trajectory.

Background

Lithium is widely referred to as "white gold", similar to petroleum being “black gold”, and is a critical element in the shift towards green energy. It serves as a fundamental component in lithium-ion batteries, the primary energy storage system in electric vehicles (EVs). While lithium-ion batteries have been employed in portable electronic devices for several years, their use in EVs is growing rapidly. By 2030, it is anticipated that 95 per-cent of global lithium demand will be for battery production. However, the price of lithium has been declining for several months, and the recent discovery of Iran's reserve is expected to continue this trend. The extent of the impact on global markets will depend on Iran's ability to export and their production capacity.

Iran's economy is facing significant challenges due to a combination of domestic and international factors. The country has been under severe economic sanctions from the United States since 2018, which has severely impacted its ability to trade with other countries and access the global financial system. The ongoing protests and civil unrest have also taken a toll on Iran's economy. Inflation has been a major problem in Iran, with the annual inflation rate reaching over 40% in 2022. This has led to a decline in the purchasing power of the Iranian currency, the rial, and made it difficult for many Iranians to afford basic necessities.

Analysis

Given Iran's current domestic instabilities, the new find will likely be used as a tool to stabilise the Rial (IRR) which is especially volatile due to international sanctions adversely impacting the country and international political disputes, like the developments linked to the JCPOA. However, as extraction is not planned to begin till 2025, there will not be any real direct short-term economic relief; the government will have to rely on the market’s reaction to future potential.

The discovery will also have diplomatic and foreign policy implications. According to IEA projections, the concentration of lithium demand will be in the United States, the European Union and China. Iran can leverage the necessity of lithium supply to the energy transition and net-zero emission goals as a bargaining chip in future negotiations with Western powers over sanctions relief and its nuclear activities. Iran's growing and diversifying portfolio of essential commodities is a potential threat to those pushing for its exclusion from global trading networks. The new discovery can even act as a catalyst for Iranian membership in BRICS. 

China has long-standing economic and political ties with Iran, even amidst Western sanctions. China has been a significant importer of Iranian oil, and in recent years, they have invested heavily in Iranian infrastructure and other sectors. With the discovery of a large lithium reserve in Iran, China is primed to take advantage of its relationship to further pursue its trade interests for rare earth minerals.  This could further strengthen the economic ties between the two countries, and also create a new avenue for diplomatic relations. However, the relationship between China and Iran is not without its complications. China's increasing involvement and improved relationship with Iran's regional rivals such as Saudi Arabia has raised concerns in Tehran.

Despite these challenges, the potential economic benefits of the lithium discovery in Iran are significant enough that China is likely to overlook some of these complications and Iran can strengthen its diplomatic ties with political powerhouse. The demand for lithium is expected to increase exponentially in the coming years, particularly in China, which has set ambitious targets for the adoption of electric vehicles. Therefore, the availability of Iranian lithium could be a significant boost to China's domestic EV industry.

A Second Scramble for Africa?: U.S.- China Competition for Rare Earth Minerals

The global demand for rare earth minerals has been on the rise in recent years, driven by the growth of high-tech industries such as electronics, renewable energy, and aerospace. These minerals are a group of 17 elements that are essential to the manufacture of these products, due to their unique magnetic, optical, and catalytic properties. However, these minerals are found in small concentrations and are difficult to extract, making them a strategic commodity that is vital to the functioning of modern societies.

China is the world's largest producer of rare earth minerals, accounting for more than 80 per-cent of the global supply. This gives China significant geopolitical leverage, as it is able to control the supply and pricing of these critical minerals. In recent years, China has been using its dominant position to assert its influence in global affairs, including trade negotiations and technology transfer agreements. The United States is heavily dependent on China's rare earth minerals, importing nearly 80 per-cent of its total rare earth minerals.  This has become a concern for the US government, fearing that China may use its control over rare earths as a tool of economic and political coercion. This fear has only been exacerbated due to the effect the Russo-Ukrainian war has had on crucial commodities and rising tensions surrounding Taiwan. To reduce its dependence on China, the United States has been seeking alternative sources of rare earth minerals, and it has turned its attention to Africa too. Although many African countries already have long-standing mining agreements with China, there has been a recent push to break free from deals some see as not mutually beneficial. 

Several African countries, including South Africa, Namibia, and Tanzania, have significant deposits of rare earth minerals. However, the development of Africa's rare earth industry has been hampered by a lack of investment, technical expertise, and infrastructure making it heavily reliant on foreign investment mainly from China. This has left African countries vulnerable to exploitation by foreign companies, who have been accused of prioritising profit over environmental and social concerns.   

China has been actively investing in Africa's rare earth industry, seeking to secure its own supply chain and gain a strategic advantage over other countries. As of 2021, Chinese banks made up 20 per-cent of all lending to Africa and in recent years China has been providing African countries with significant technical assistance, including building infrastructure and providing equipment and training for rare earth mining and processing. This investment has given China a foothold in Africa's rare earth industry and has raised concerns about the potential for environmental and social exploitation. During the World Economic Forum at Davos, the President of the Democratic Republic of Congo (DRC), where 70 per-cent of the world’s cobalt comes from, complained that a $6 billion infrastructure for minerals was heavily one sided, with a majority of the cobalt being processed in China. 

These recent signals at a move away from China to potentially better alternatives have not gone unheard by the emerging superpower’s primary rival, the United States. Indeed, the DRC was one of many nations in attendance at the Minerals Security Partnership setup by President Joe Biden and also signed a memorandum with the US in December 2022 to develop supply chains for electric vehicles. In 2019, the US government announced plans to invest in Africa's rare earth industry, with the aim of establishing a reliable supply chain of these critical minerals. These recent acts are just the beginning of what the US government hopes will be a new leaf in their relationship with African countries to develop their rare earth industries and build infrastructure while promoting sustainable mining practices.

The competition for rare earth minerals highlights the need for a global approach to resource management. As the demand for high-tech products continues to grow, the pressure on rare earth minerals will only increase. While some are looking to our solar system’s mineral rich asteroid belt as a way of obtaining these resources, we are most likely decades away from developing the necessary technology and, in the meanwhile, the resources needed to develop said technologies will continue to be fought over. It will take some time before the US is able to really rival China in Africa’s debt markets, but US policy makers are hoping to have made a significant enough dent in China’s hold over the industry before tensions rise any higher between the two world powers.

Critical Raw Materials - The Geopolitical risk of supply chain dependencies

The Covid-19 pandemic coupled with the war in Ukraine have led to major structural changes and shifts in the global economy, leading to debates about the possible end of globalisation. These major changes in geoeconomics have shaken the international liberal order, enhancing pre existing challenges such as dependencies with strategic rivals for critical raw materials and rare earth elements. This article highlights the geopolitical risks of supply chain dependencies for rare earth elements in three steps. It will investigate which elements and materials are considered to be strategic and why. It will then analyse the interdependencies between extraction and mining countries, with a specific focus on China. It will conclude with a reflection on the main risks and trade-offs of these geopolitical supply chain dependencies. 

Critical Raw Materials (CRMs), Rare Earth elements (REEs) – a group of seventeen metallic elements – and critical minerals – non-fuel mineral or mineral material –  are considered crucial for strategic industries, such as technologies used in the digitisation process, the energy transition and the defence industry. They are used in the construction of wind turbines and solar panels, advanced electronics, batteries for electric storage, cars, the development of technologies and components of fighter jets. Geopolitical shifts, such as the acceleration in the digitisation process, the energy transition, coupled with the war in Ukraine may cause supply shortages or additional vulnerabilities to supply chains. These shifts pose challenges such as finding alternative suppliers and alleviating dangerous dependencies.

To better understand the importance of these supply chains, it is worth investigating two examples of strategic sectors that require critical raw materials: the energy sector and the defence industry. 

The energy transition 

Climate change is at the top of the agenda for several international organisations and countries around the world. The dangers we face due to increasing temperatures and the consequences of this phenomenon for the environment, human beings, and the cascade social, political and economic effects, has increased the urgency for alternatives. Population growth over the past decades has led to the increase in the demand for energy and consequently to the rise of oil, natural gas and electricity prices, together with a further depletion of natural resources and raw materials. Higher energy prices, exacerbated even more by the current war in Ukraine and the politicisation of natural resources by Russia, urges new alternatives such as renewables and an acceleration in the transition towards the so-called green sources of energy. However, in order to produce renewables such as wind turbines, solar panels, or electric batteries for cars, CRM’s such as lithium, cobalt, tungsten, nickel or platinum are needed. These critical raw materials are scarce in supply, unevenly distributed, expensive to extract, and paradoxically even toxic for the environment. Moreover, in most cases the majority of these sources are located in countries whose political situation may be defined as unstable, characterised by autocratic governments or both: 50% of the world’s supply of cobalt, for example, is located in the Democratic Republic of Congo and 40% of manganese in South Africa. China, moreover, will be analysed deeper in the subsequent section and is by far the country that controls most of the world’s extraction and processing capacities for raw materials. 

Defence Industry 

In the defence industry there are multiple critical raw and rare earth materials used in the production of satellites communications, aeronautics, military surveillance systems and fighter jets’ components, such as lithium for batteries. Due to their significant roles for national security, they are listed among the 50 critical and strategic materials and minerals for the United States. As for the energy transition, the risk for the defence industry lies in the dependency of the supply chain from countries that are either unstable or strategic rivals: countries that because of their domestic political and social situations may increase the market volatility, soar prices, or simply use their leverage for supply cut-offs or hybrid attacks on domestic production lines. Niger, for example, is an important exporter of uranium, however, its domestic and neighbouring unstable political context makes it an unreliable partner. A disruption in the supply chain of a critical raw or mineral material may, indeed, undermine the production, reparation or modernisation of military equipment, as it already happened with the interruption of F-35 fighter jets deliveries due to cobalt sourcing problems. Fighter jets, like the F-35, require around 417 kg of rare earth materials for critical components such as electrical power systems and magnets. F-35s deliveries were suspended as the company’s producer, Lockheed Martin, realised the magnet used in the Honeywell-made turbomachine — an engine component that provides power to its engine-mounted generator — was made with cobalt and samarium alloy coming from China.

China

Critical rare earth, minerals and raw materials are unevenly distributed, which makes powers such as the United States and Europe obliged to rely on foreign and overseas countries — China, Australia, Canada, Russia, Africa or Central Asia. Yet, there is one country above all others, that has the most power and control over extraction, processing, export and with an almost monopoly of the refining process of CRM (90%), this is China. One of the biggest Chinese rare earth extraction, mining and refining companies, for example, is the China Northern Rare Earth Group High-Tech Co Ltd (Northern Rare Earth), whose headquarter is in Inner Mongolia Baotou, and is specialised in rare oxide and magnetic materials. The almost Chinese monopoly over the refining capacities of rare earth materials is of crucial strategic importance. The bottleneck on rare earths is, in fact, the concentration and purity of natural deposits and the need to refine mined minerals with energy-intensive processes. A recent study by Benchmark Mineral Intelligence shows, indeed, how China’s power and control over the production of lithium ion batteries for electric vehicles, for example, relies for 80% just on the refining process (Figure 1).  

Figure 1: “Where does China’s dominance lie in the lithium ion battery to EV supply chain?”

Source: Benchmark Mineral Intelligence

In 2010 a European Commission sponsored study group identified 41 critical raw materials, of which 14 were considered of high supply risk and high economic importance, among which there were antimony, beryllium, cobalt, fluorspar, gallium, germanium, graphite, indium, magnesium, niobium, Platinum Group Metals (PGMs), Rare Earth Elements (REs), tantalum, and tungsten. 

To assess the concentration in commodity markets the index used is the one developed by the economists O. C. Herfindahl and Albert O. Hirschman. The Herfindahl-Hirschman Index (HHI) is defined as the sum of the squares of the fraction of market share controlled by the 50 largest entities producing a particular product. The maximum value of this index is unity, and the US department of Justice established that between 0.15 and 0.25 the concentration is considered as moderate; above 0.25 it is, instead, highly concentrated. China’s global market position with regards to these critical materials is of particular importance as it produces more than 12 of the 41 critical materials identified by the European Commission, 9 of which of high supply risk. 

China’s rise in market share of critical materials’ global production has sharply increased in the past few decades, leading the country to acquire a dominant strategic position. This outcome is the result  of three main factors: the country’s large resource base; the Chinese government's long-term emphasis on strategic raw materials, rare earth, minerals and magnets for the “Made in China 2025” strategy; and finally, China’s ability to produce raw materials at a lower cost. China is the largest battery producer: dominating battery material separation and processing, component manufacturing, and controlling the downstream end of mineral processing and rare earth magnets, all critical elements necessary for the energy transition. This is a part of the global strategy adopted by China and best exemplified in the Belt and Road Initiative (BRI): gaining control of material production outside of China, imposing production quotas or restrictions to exports, leading to higher prices and volatility. To further consolidate its dominant role and power in the CRM’s domain, China has, moreover, recently established the China Rare Earth Group Co. Ltd: merging three state-owned rare earths entities. This megafirm, based in South China, accounts for around 62% of the country’s heavy rare earths supplies and it will enable the country to increase its competitiveness and pricing power, triggering dangerous consequences for the world supply chain.  

The geopolitical risk of this dependency is twofold. On one hand, there is the confrontational nature of China, who as a power, could potentially restrict exports during a dispute or simply due to domestic production needs, thus causing a spike in prices. On the other hand, the risk is determined by the deep interdependence between Western powers and China for scarce, rare and critical materials. Indeed, between 2017 and 2020 the USA has imported around 76% of rare elements from China (Figure 1), whereas Europe 98%. 

Figure 2: Major import sources of nonfuel mineral commodities for which the United States was greater than 50% net import reliant in 2021

Source: US Department of the Interior, US Geological Survey, Mineral Commodities Summary 2022

Furthermore, a report presented by the Government Accountability Office in 2010 shed light on the dominant role of China at all levels of the supply chain for Rare Earth Elements (REE). China produces 95% of raw materials, 97% of oxides, and 90% of metal alloys, and holds 37% of REE world reserves. From a military perspective, the high concentration of raw materials production by a strategic rival is incredibly threatening in case of a military confrontation due to the potential disruption to weapons systems production. 

Risks and trade-offs

It is noticeable from the previous analysis how the concentration of CRM’s supply in the hands of just one global actor immediately increases the risks of interdependence. Countries with large market shares in the supply of one critical material can distort its production, increase market vulnerability and the volatility of prices, causing strategic disruptions. 

Two possible solutions could limit the supply chain risks for critical raw materials and rare earth resources: on one hand finding new suppliers, on the other increasing controls of market shares. The first one is diversification: many resource-rich countries have been neglected in the recent multinational Minerals Security Partnership in June 2022 agreement, such as Vietnam, Chile, Argentina, Indonesia, the Philippines, Brazil, Cuba, Papua New Guinea, Madagascar and Mozambique could all be candidates for critical mineral production. However, despite trying to diversify and finding possible alternative suppliers, some rare earth materials are scarce and finite in nature. The second alternative, therefore, may be to increase partnerships and international cooperation, rather than isolationism, through multinational systems and controls over excessive market shares of a single commodity by one country. The United States, for example, has already released joint statements and signed agreements with multiple countries on critical material supply chains, security of dual-use technology, and mutual supply of defence goods and services. In this direction goes also the recent establishment of a transatlantic supply chain for rare earth metals spanning from Canada to Norway and Sweden. The mining will be performed in Canada’s Northwest territory, by the company Vital Metals, the only one in North America not selling to China. The long-term and strategic goal, therefore, is to avoid China or any dependence on it for the supply chain.

In conclusion, there is a double trade-off for policymakers. On one hand, the pervasiveness of Chinese presence and control of so many critical raw materials, rare earth, mineral and magnet sources, makes it difficult to tackle a politically strategic and rising rival power, while depending on it for critical supply chains. On the other hand, but also interconnected, the trade-off is between China and climate change. The energy transition, necessary to defeat climate change, requires technology and CRM that comes from China’s production. Therefore, is it possible for Western countries, such as the United States and the European Union, to counter the Chinese rise while having such risky supply chain dependencies?