Green Energy Depends on Critical Minerals. Who Controls the Supply Chains?

Adnan Mazarei is a nonresident senior fellow at the Peterson Institute for International Economics, and Luc Leruth is a visiting resident scholar at the International School of Economics at Tbilisi University and an associate researcher at the University of Clermont-Ferrand. This post is based on a recent paper by Mr. Mazarei, Mr. Leruth, Pierre Régibeau, chief competition economist in DG Competition at the European Commission, and Luc Renneboog, Professor of Corporate Finance at Tilburg University and associate researcher at the European Corporate Governance Institute.

With the accelerating transition away from fossil fuels, awareness of the role of minerals critical to the production of clean energy (including cobalt, copper, lithium, nickel, and rare earth elements) has increased. There is a sharper focus on rising prices; production; delivery delays; as well as on the vulnerability of their supply chains. The Russian invasion of Ukraine has exacerbated these concerns.

Several of the factors that increase the risks to the stability and reliability of the supply chains of green energy are well researched. These include geographical concentration of the main components of the supply chain; climate risks; and environmental, social, and governance (ESG) issues. The concentration of production in one or a few countries makes the supply chains relying on those minerals vulnerable not only to market power and logistical risks but also to geopolitically induced disruptions, especially through trade restrictions.

The issue of who ultimately controls the production of minerals and the governance context in which they operate are also very important but much less researched. Production of a mineral could be widely dispersed globally, but a particular entity (a holding company or a few competing companies located in a country where authorities have the power to force a coalition if it suits their geopolitical interest) may have ultimate control (including through subsidiaries) over the decisions of the top firms producing that mineral, even if they are in different countries. That entity would then have a high degree of control, including market power, over the global production of that mineral and the supply chains that use it. More generally, there is a risk associated with imperfect information about entities that control a (mining) process, including their ultimate objectives, the geopolitical tendencies of the country in which they are located, and the length of time they intend to hold the controlling shares.

Assessing the fragility or vulnerability of supply chains requires identifying the parties that have a substantial degree of control over the producers of critical minerals, but this is not straightforward. To do so, we use a game-theoretic concept that measures the ability of a shareholder to change the outcome of a vote in the company where it has shares (directly or through subsidiaries), using large datasets processed by software made available by ZENO-Indices, a Fintech specialized in governance.

Our analysis reveals that China’s control over the global value chains involving critical minerals and rare earth elements extends beyond what is commonly assumed. First, China is the dominant actor in the supply chains of clean technologies, including upstream (mining), even though most mines are not located in China. Contrast that with oil and gas where the United States dominates the supply chain (upstream, refining, and consumption) but is only a small player in critical minerals. Second, this raises important strategic issues given that large reserves of critical minerals are located outside of the EU and the United States. China could for example interfere in the operations of private firms controlled by Chinese entities, even if they are based in other countries. In contrast, the controlling shares held in mining by US-based companies belong to passive funds (investment funds that only follow a certain market index) on which the US government has no direct control unless it invokes legislation such as the Defense Production Act of 1950.

To counter these concerns, countries requiring critical minerals and rare earth elements need to take several actions while avoiding protectionist reactions. These include upgrading their knowledge of the web of ownership and the control structure of companies operating in the critical minerals industry and pay greater attention to governance problems in producing countries. This will also help assessing and managing economic and geopolitical risks. Consuming countries should also carefully review mergers between producing firms and/or consuming firms to prevent production bottlenecks. Since Europe has almost no reserves of critical minerals while the US may have difficulty accessing them (unlike in most countries, what is under the soil in the US belongs to the owner of the land and not to the country), the US and Europe are in a very similar position and would benefit from greater cooperation, especially to enhance recycling in order to reduce dependency on foreign supply; and to encourage research and development in order to speed up the adoption of technologies of substitution.

The complete paper is available for download here.

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