Fragmented markets from geopolitical conflict threaten to throw energy transition off track

Critical minerals' concentrated production, hard-to-substitute consumption and vital role in green technologies make them highly vulnerable to the threat of more severe geoeconomic fragmentation, putting the clean energy transition at risk, according to new research, but geopolitical experts also see room for economic opportunity based on lessons learned from the oil sector.

The International Monetary Fund Oct. 3 released a chapter from its World Economic Outlook, which delves into the impact of geoeconomic fragmentation in commodity markets.

The new analysis comes after the pandemic and Russia's invasion of Ukraine triggered commodity price spikes and shortages and highlighted the fragility of the global economic system. Fears of further fragmentation have grown, particularly as tensions between the US and China rise.

New IMF research looks at 48 commodities across the energy, agricultural and critical mineral sectors and analyzes the implications of fragmentation of those global commodity markets into two hypothetical geopolitical blocs -- with the US and Europe at the helm of one and China and Russia leading the other. The blocs were based on the March 2022 UN General Assembly vote demanding that Russia end its war on Ukraine.

The key takeaways were that "minerals and some agricultural commodity prices are highly vulnerable in the event of fragmentation; low-income countries will be the most affected in the event of further fragmentation; ... and, with fragmentation in critical minerals markets, the energy transition could become much more costly," IMF economist Martin Stuermer said during a panel discussion hosted by the Atlantic Council.

300% price surge

Stuermer noted that in most of the IMF's economic simulations, energy commodities were less vulnerable than others because energy production is less concentrated.

But, in a world that is fragmented, the prices of critical minerals like copper, nickel, cobalt and lithium would be 300% higher than in a world with fully integrated markets. And those higher costs, he said, would cause roughly 30% less investment in renewables and electric vehicles in fragmented markets, compared with integrated markets.

The best option for preventing this would be preventing fragmentation from occurring in the first place through multilateral cooperation and enhancement of WTO rules on export restrictions, export tariffs and discriminatory subsidies to "prevent vicious cycles where countries impose restrictions on each other," Stuermer said.

But if policymakers cannot achieve that, the second-best option would be for countries to focus on more narrow agreements for highly critical and vulnerable commodities, he said.

"They could establish so-called corridor agreements to keep the trade flowing in these markets ... a green corridor, for example, for key critical minerals."

The IMF's work is expected to set the stage for the annual meetings of the World Bank Group and IMF to be held Oct. 9-15 in Marrakech, Morocco.

Rethinking the clean energy transition

Ellen Wald, a senior fellow at the Atlantic Council's Global Energy Center, homed in on the IMF's findings that energy commodities have been the least impacted by fragmentation. While so much attention has been placed on oil prices, this "analysis shows that's perhaps not where we should be focusing all of our attention and concern."

Wald said it exposes a need for "policymakers to maybe rethink the meaning of the clean energy transition" and its emphasis on electrification in order to consider "new, potentially better paradigms to make transportation cleaner that don't revolve around replacing internal combustion engine vehicles with battery-powered vehicles, given the immense [supply chain] challenges."

She further suggested that the critical minerals space could learn some lessons from the oil industry, for which "the deck chairs got a bit rearranged but things seem to still be flowing" following recent geopolitical upheaval.

For instance, the critical minerals industry may want to consider the benefits of forming a producers' group like OPEC, which she said has been able to transcend the bifurcated bloc narrative.

Pointing to Saudi Arabia as an example, she said the kingdom would fall under Team US-Europe for geopolitical and security reasons. But while it has supplied Europe with oil in the absence of Russian supplies, it has also bought Russian diesel as well as worked with Russia through OPEC+ to maintain higher oil prices.

"I think it might be useful at least for the non-economists to consider ... how the introduction of, say, a lithium OPEC ... might impact prices on top of fragmentation," Wald said. "There are too many countries with too many important commodities essentially to force kind of a choice."

Economic opportunity

Reed Blakemore, the Global Energy Center's director of research and programs, pointed to a likely "third bloc" of countries that "are keenly aware that they have a fair amount of leverage ... and are happy to try and bargain between the two big blocs to try and curate whatever gives them the best economic opportunity."

What the relationship between Bloc A and Bloc B will look like with Bloc C is a space that Blakemore said is rapidly unfolding within the critical minerals markets.

Wald offered that miners could again learn from the oil market, which saw a similar scenario play out when the G7 imposed price caps on Russia crude and oil products. Countries like Indonesia and Turkey, she said, immediately emerged as a kind of Bloc C that took the risk of importing Russian oil but benefited as they refined it and sold that product to European countries.

"I think in general the lower-income countries may be losers in this respect, but it exposes new economic opportunities that they may be very keen to get on," Wald said.