The Stumbling Block in ‘the Race of Our Lives’

Transition-critical Materials, Financial Risks and the NGFS Climate Scenarios

March 7, 2023Published by LSE Grantham Institute

In this groundbreaking paper, leading academics from the Grantham Research Institute and the Centre for Climate Change, Economics and Policy, anticipate that bottlenecks in the supply of materials such as lithium, copper and nickel will present serious issues for central banks’ core mandates and may be a “stumbling block” for the low-carbon transition.

Decarbonisation will require a massive upscaling of the supply chains for these transition critical materials (TCM). The paper identifies 27 raw materials, including metals, minerals and rare earth elements, which are crucial for low-carbon technologies such as solar panels and electric vehicles. The authors warn that abrupt increases in demand, coupled with supply-side risks and near-term inelasticity of supply, may lead to material bottlenecks, causing price shocks, systemic risks and transition delays.

They argue that in the case of lithium this “phenomenon is already materialising” and estimate that demand will exceed supply by 2025. Between mid-2021 and mid-2022, prices increased by between 300-500% in anticipation of scarcity.

The paper explores the impact of TCM supply and demand on central bank core objectives by modelling global demand under two scenarios: delayed transition and net-zero by 2050.

Results show that delayed transition would cause more abrupt increases in demand, greater supply-demand imbalances, and more frequent price shocks. In a net-zero scenario, total increases in annual demand were found to not exceed 8mn tonnes in any five-year interval, whereas in a delayed transition demand increases of around 16mn tonnes occur twice.

The authors then explore transmission channels by which bottlenecks could affect financial and price stability.

  • As many TCMs such as copper are key to other industrial sectors, price spikes could spill over and cause broader inflationary pressures.
  • Enduring scarcity will make it harder to stabilise price fluctuations through material inventories, leading to more serious and long-term inflationary consequences.
  • The growing financialisaton of TCM markets, as indicated by increasing price fluctuations, increases their vulnerability to pro-cyclicality and short-term shocks.
  • If rising prices increase costs for low-carbon technologies this may jeopardise the transition, which will increase physical risks, including nature and climate-related supply impacts. Some, such as water scarcity, may suddenly reduce TCM production, causing further price shocks and stranding TCM production assets.

The paper refers to other research which finds that scarcity “relates more to techno-economic supply than raw material availability”. Each TCM faces a unique set of supply-side risks and the authors group these under two main themes: production and geopolitical issues.

Production risks include operational issues, social impact and opposition, environmental risks (especially water stress), declining ore quality, biodiversity loss, and labour strikes due to poor working conditions. The authors’ analysis highlights that meeting climate goals, incorporating just transition principles, and mitigating nature-related financial risk are essential in reducing supply chain disruptions.

The geopolitical risks are large import dependencies, warfare and export tariffs. A recent example of this was when the London Metals Exchange stopped trading after the Russian invasion of Ukraine, due to the extreme price volatility this triggered.

According to the authors, the vulnerability of the financial system to shocks caused by supply disruptions varies for each TCM. This variation depends on the extent of market concentration, the technological possibilities for material substitutions, mine development lead times, and the recycling rates of each TCM.

This page was last updated March 7, 2023

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