How Can a Financial Reserve Maintain Supply of Domestic Critical Minerals?

Policymakers continue to show bipartisan support for domestic critical mineral production. However, the benefits of critical minerals will vanish if mines shut down due to volatile prices. Critical mineral projects suffer a very real, outsized risk of price volatility, largely because they produce emerging or niche commodities with opaque and concentrated markets susceptible to disruptive trade practices like price dumping. Policymakers must therefore prioritize helping critical mineral projects survive, in addition to bringing them online in the first place.

Recent policy discussions, including positions of The House Select Committee on competition between the United States and China, have honed in on a critical minerals financial reserve mechanism to insulate domestic supply chain actors from market volatility. By providing monetary support to domestic critical mineral projects, a financial reserve would keep mines operational when commodity prices crash below a threshold at which domestic industry could not operate economically on its own. For example, say domestic cobalt producers need to sell cobalt at a minimum price of $25 per pound on average to stay operational. If cobalt prices dropped to $20 per pound, a financial reserve using a contract-for-differences approach would compensate the mines $5 for every pound of cobalt they produce.

This analysis informs policy discussions on the design of a critical mineral financial reserve. Namely, estimates of the program’s potential cost indicate that supporting all critical mineral commodities could require a standing budget of well over $1 billion. Recognizing the potential that policymakers find this cost infeasible, this analysis explores potential criteria for deciding which commodities constitute a strategic priority. It also outlines budgetary constraints, raises key questions in administering payments, and compares the appropriate application of a financial reserve to other methods of support. Overall, a financial reserve offers a promising tool for securing critical mineral supply, insulating current production from volatility while incubating emerging markets and encouraging entry of new participants.

Budgetary Considerations

In order for a critical minerals financial reserve to operate effectively, the mechanism needs sufficient funding on hand to weather dramatic market shifts without waiting for policymakers to deliberate reappropriations. A number of factors govern budgetary implications: the range of commodity prices over which the reserve pays out (including possible repayment into the reserve when prices are high), how long the fund is designed to last during low price periods, and which critical minerals the reserve supports.

Policymakers will need to determine the appropriate commodity prices at which the reserve would start paying out by interfacing closely with industry stakeholders, since the threshold at which a mine cannot operate economically is sensitive to mine business models and will vary from commodity to commodity. The reserve would pay out larger amounts the farther commodity prices drop below this point. Policymakers could then set a floor on how low a price the reserve would honor. The reserve would still pay out even if prices drop further, but the floor would dictate the maximum amount of compensation. Setting these limits would help control expenditures, but could fail to fully support mines during exceptionally severe market downturns.

A crucial aspect of the reserve’s requisite budget involves the intended longevity of price support once low commodity prices start triggering payments. This window is a matter of strategic choice and could differ for each commodity based on projections of how long various market scenarios could last. Policymakers can always extend the reserve’s lifetime by appropriating additional funds, or aim to replenish funds by requiring mines to pay back into the reserve when prices are high. Yet, appropriations may take time to arrange, and replenishment during periods of high prices may prove unpredictable. Therefore, policymakers must establish sufficiently large budgets to support industries throughout the intended breadth of time without relying on replenishment.

In its broadest conception, the reserve could support all domestic critical mineral production categorically. However, this represents a likely prohibitively large set of nearly 30 critical minerals with some level of domestic production. Furthermore, for each mineral it may not be politically realistic to offer the reserve’s support to some mining operations and not others. So, whatever critical minerals the reserve takes on, the mechanism must be able to support domestic production for those commodities in their entirety.

The figure below shows the estimated budgets required to support a selection of just 8 critical mineral commodities for a period of 1 year at illustrative low prices.

For context, the combined budget for the above selection alone already exceeds the $1.3 billion value of materials held by the National Defense Stockpile. Similarly, the Strategic Petroleum Reserve spends, on average, roughly $500 million a year for oil purchases and facility maintenance. Policymakers will realistically need to limit the reserve’s coverage to only select critical minerals.

Strategic Priorities

One strategy could be for the reserve to cover as many individual critical minerals as possible. This strategy would prioritize commodities that require smaller individual budgets, based on how much the U.S. produces and the price ranges over which the reserve would pay out to mines. The table below details these inputs for the same selection of critical minerals shown above. Zinc, for example, is relatively cheap per unit of metal, but based on the sheer volume of production, it requires one of the biggest budgets.

This approach would maximize the number of domestic commodity markets the reserve supports, but may overlook unique aspects of each commodity. For example, cobalt requires the least funding out of the above selection, which is attractive from a strictly budgetary perspective. This alone, however, does not account for cobalt’s potentially waning strategic value should battery markets continue to shift towards cobalt-free chemistries.

Note too that domestic production volumes may increase over time as demand-side drivers and federal initiatives spur growth. Policymakers need to consider the anticipated growth of each critical mineral. For instance, the budget for lithium noted above only considers the projected output of Thacker Pass. However, numerous other proposed U.S. projects could soon substantially increase the funding required to support all domestic production.

Cases like lithium raise the question of whether the reserve mechanism should aim to ensure long-term supply chain security or rather seek to incubate projects for emerging commodities until a more robust and stable domestic market develops. An incubation strategy would allow the reserve to cover a dynamic selection of critical minerals that can change over time, withdrawing support of a given commodity as new operations enter the market and production volumes increase.

Alternatively, some commodities may pose particular national importance that warrant financial support regardless of market size or maturity. Executive branch agencies, for example, may value critical minerals based on their strategic application, such as graphite in batteries or rare earth metals in defense technologies and new energy technologies. Alternatively, Congress may optimize for overall economic benefit. Priority, to this end, would go to commodities producing the greatest downstream added value per dollar spent, or those supporting widespread applications benefiting multiple downstream industries.

Another strategic consideration is whether the reserve should only intervene in response to exceptional market disruptions, such as international price dumping. Responding only to extreme cases would, in practice, prioritize critical minerals with particular susceptibility to market manipulation and volatility like graphite, rare earth elements, or nickel.

Finally, policymakers must consider if the reserve should play a greater role in explicitly nurturing domestic supply chains. Doing so may require provisions, such as restricting the reserve’s support to mines that sell ore to domestic processing facilities or refined products to domestic customers. This approach would allow the reserve to help directly secure supplies for downstream supply chain actors and manufacturers. However, it would also limit the selection of eligible critical minerals to those with some domestic processing capacity or manufacturing end uses. For example, the eligibility of nickel and cobalt under domestic sale conditions would depend on future refinery projects successfully coming online since such mined ores would otherwise go abroad in the absence of domestic processing capacity. Such criteria might therefore favor commodities more amenable to vertical integrated domestic supply chains like graphite, lithium, and rare earth elements.

Implementation Methods

The reserve’s effectiveness depends not only on sufficient funding but also on how such a support mechanism implements payments and interfaces with mine operators. Policymakers must therefore consider various details related to the reserve’s operation in real-world practice.

A chief question is whether the reserve would need to make payments to mines in real-time or if mining companies could tolerate payments on a reimbursement basis. The latter approach offers many practical benefits in administering the reserve but poses challenges to mining operations that perhaps cannot bear operating at a loss until the reserve distributes reimbursements. Larger mining companies may enjoy more flexibility in this respect so a one-size-fits-all approach may not be appropriate.

Another consideration is that policymakers could require mines to repay back into the reserve when commodity prices recover. Note, however, that such market conditions may not occur often or long enough for repayments to fully replenish funds to the level required to accomplish policy objectives.

Finally, if policymakers condition support based on whether mines sell their ore to domestic processing plants, then they must also consider the perspective of those processing facilities. Processing facilities often do business with mines based on market prices so payment administration approaches must not disrupt their business model. Furthermore, such restrictions may encourage mines to seek new relationships with eligible processors that may not possess capacity to take them on due to existing arrangements. These considerations could become more complicated if conditions for support also require the supply of domestic manufacturers even further downstream.

Comparison with Physical Stockpile

A financial reserve maintains supply chain resiliency by keeping critical mineral mines operational during uneconomically low commodity price periods. For this purpose, monetary payments alone could suffice. A government agency taking physical possession of materials may not only be unnecessary but also counterproductive, as it would take supplies off market.

Stockpiling also comes with a number of practical complications:

• Larger budgetary needs due to facility expenses and the need to purchase materials in their entirety rather than only compensating for price differences below certain thresholds.

• Limited availability of materials to purchase, due to existing industry supply contracts.

• Potential for material degradation.

• Addition of a middleman to existing supply chains.

• Higher commodity prices caused by taking supply off market, which may needlessly impact downstream consumers.

• Reduced ability to cover multiple critical minerals.

Despite these complications, policymakers could still consider stockpiling in specific contexts. Namely, stockpiling could stabilize prices in either direction by taking supply off the market when prices fall too low, and reintroducing the materials to the market when prices spike too high. This approach may more appropriately benefit established critical mineral supply chains with stakeholders that face less susceptibility to outright closure and depend more upon price stability. Stockpile releases may provide particular utility given that mining operations cannot ramp up production in response to high prices as quickly as, say, the oil and gas industry.

Alternatively, a financial reserve may better support nascent critical minerals industries with mines that are more sensitive to market volatilities and downstream consumers that may not have reliable access to a diverse selection of raw material suppliers. This is because a financial reserve is irreplaceable in maintaining flow of supply by preventing mine closures but cannot correct broader market-wide prices. In fact, providing greater investment certainty and supporting mines while prices are low would incentivize production and actually discourage price recovery. This could make mines dependent on support until downstream demand rises enough independently to stabilize prices.

Conclusions

A financial reserve will ultimately help secure reliable supplies of critical minerals alongside other policy programs and innovations, including foreign minerals security partnerships, lower-cost technologies like solution mining or direct lithium extraction, or even recycling programs using scrap as a physical stockpile. Policymakers must articulate a multi-pronged approach to satisfy U.S. critical mineral needs.

That said, a financial reserve offers a relatively accessible way to fortify existing U.S. domestic production. Insulation from market volatility helps incubate domestic critical mineral supply chains into mature, stable industries. Currently, the domestic critical mineral industry faces considerable barriers to entry, from difficulties securing capital for higher-cost, often technically-novel domestic projects to competition from lower-cost competitors with less stringent environmental and labor standards. A financial reserve cannot solve all of these challenges, least of all fundamental geologic resource constraints, but protection against price volatility can go a long way towards encouraging new market entry and growth.

A financial reserve would also complement other federal policy measures promoting domestic critical minerals production like grants, loans, and domestic content criteria, thereby maximizing their effectiveness and protecting public investment. The Idaho Cobalt operation, for example, received a Department of Defense grant, only to pause operations shortly thereafter as Congolese and Indonesian supply continued to drag low commodity prices lower. Meanwhile, the grant-funded processing facilities at the Mountain Pass rare earth operation similarly risk falling idle if the mine halts production—as has happened multiple times in the past following fluctuations in Chinese rare earth exports. Recent history reminds that national critical mineral efforts often fall short of expectations without support designed to sustain these industries as they scale up and develop expertise.