Global oil and gas markets are fragmented following the onset of war in Ukraine, creating longer and more inefficient supply chains. A similar dynamic will have a detrimental effect on energy transition as a result of the ongoing confrontation between China and the west over the control of critical minerals, the IMF says.
Resource concentration and geopolitical fighting over their control have led to price and supply shocks in energy markets, most recently in 2022-23 as Moscow curtailed gas exports to Europe and the G7 banned Russian oil and imposed price caps on Russian exports to emerging economies. But in terms of price volatility, "energy is less vulnerable than many of the other commodities, and that's because energy production is less concentrated", according to IMF economist Martin Stuermer, co-author of the organisation's research into how geopolitical fragmentation will affect energy transition.
Mining and processing for the metals crucial to producing electric vehicles (EVs), batteries and power grid transmission lines are highly concentrated. The top three producing countries account for almost 90pc of lithium supply, and the equivalent shares for cobalt and nickel are 80pc and 65pc, respectively, the IMF says. By contrast, the top three oil producers — the US, Saudi Arabia and Russia — accounted for roughly 40pc of global supply last year.
China's dominance of mineral refining is of the highest concern to the US and the EU, which plan to subsidise domestic processing capacity and partner with allies to invest in critical mineral supply chains that do not depend on China. Imposing restrictions on China's ability to import critical minerals will be a net loss for the world because it would affect Chinese refining capacity immediately, while similar industries elsewhere will take decades to build, the IMF says. Global net investment in renewable technology and EV output would be 20pc lower in this scenario, compared with continued free trading of critical minerals, it says.
Blocing formations
Research underpinning the IMF's conclusion assumes the formation of two blocs, pitting G7 countries and their partners against a Chinese-Russian bloc, with each being able to effectively disrupt trade with the other. The IMF also assumes that mining and refining capacity will be hard to scale up in the west, estimating that it takes 16 years to start operations at a new copper mine.
The fund uses its research to prepare member countries for ways to finance the energy transition, including through carbon taxes. But opponents of energy transition use those arguments to warn of supposedly debilitating costs involved in phasing out fossil fuels and transport options powered by them. US president Joe Biden's critics in Congress highlight the supply chain challenges of critical minerals to criticise national and state-level efforts to advance EVs.
Scaling up new mining capacity may take a long time — sources surveyed by Argus indicate 10-15 years depending on whether it is open-pit or underground — but mining companies are already looking at brownfield options to expand supply. Switzerland-based Glencore's pitch to acquire Canadian mining firm Teck earlier this year included plans to double the proposed merged entity's copper capacity to 3mn t/yr, with more than half of the new capacity coming from project expansions.
Energy market realities suggest that a perfect market bifurcation is unlikely to take place, as national governments will retain freedom of action to deal with both blocs. "Saudi Arabia, from a geopolitical perspective, would be on the team US-EU plus," US think-tank Atlantic Council senior fellow Ellen Wald says. But Riyadh has also maintained close relations with Russia within the Opec+ alliance, and is a key oil supplier for China, Wald says.
