Rethinking Supply Chains: US And Allies Seek To Break China's Monopoly On Critical Minerals, But Secular Inflation Will Be The Price To Pay

The U.S. and its Western allies are reassessing global supply chains in order to weaken China’s grip on critical minerals, but this move comes at a cost: a secular inflation.

Concerns over China’s dominance in crucial energy transition materials have pushed Western countries to dramatically adjust their industrial policies, according to the latest Sprott Energy Transition Materials Monthly.

“China’s dominance in mining and processing strategic energy transition materials is a vulnerability for Western countries,” said Paul Wong, CFA, market strategist at Sprott. “The concern is that China could restrict the supply of critical minerals, such as lithium and rare-earth elements, for commercial advantage or as leverage in political or trade disputes.”

Sprott’s research shows that trade patterns are moving away from globalization and outsourcing and toward supply chains that are more expensive. “Western nations’ industrial policies are now prioritizing security, redundancy, and resilience over cost-efficiency, leading to higher fixed costs,” warned Wong.

A Paradigm Shift from Decades of Globalization: Globalization has produced a surplus in global commodities, efficient supply chains and enhanced financial-macroeconomic links during the last decade, often overshadowing physical market fundamentals.

However, Wong noted a lack of investment in mining and metals needed for the energy transition has resulted in extended lead times and probable shortages of energy transition metals in the West. Disruptions in the China-controlled supply chain might impair civilian and defense manufacturing in the U.S. and other Western countries.

To counter this, the U.S. has implemented a comprehensive industrial policy centered on onshoring and friend-shoring energy transition supply chains. Through initiatives like the Inflation Reduction Act (IRA) and the Infrastructure and Investment Jobs Act (IIJA), the U.S. government is offering subsidies, tax credits and trade alignment measures to incentivize domestic sourcing and manufacturing.

Inflation Is the Price To Pay: Reduced globalization and more re-shoring or friend-shoring may seem like a worthwhile intent to reduce reliance on China and geopolitical dangers, but it could inevitably leads to higher inflation.

Although headline inflation in the U.S. has fallen to 5% from its peak of 9% due to lower energy prices and reduced supply chain constraints, Wong warns that challenges lie ahead.

This inflationary phase is exacerbated by the reshoring of previously outsourced labor to more expensive countries, as well as increased regulation and data localization hindering technology’s deflationary impact.

Inflationary pressures are fundamentally driven by the urgency of global climate change and the necessity for greener economy.

And Commodities The Assets To Own: Commodity prices exhibit a strong long-term correlation with inflation, as evidenced by the Sprott’s historical analysis showing an elevated correlation coefficient between consumer prices and commodity prices.

Sprott noticed the recent rebound in the lithium commodities market, due to improving restocking and EV sales. Market sentiment has recovered after being negative for months, resulting in greater utilization of existing lithium inventories.

The merger deal between the two Argentinian lithium producers Livent Corp. LTHM and Allkem Ltd. OROCF, valued at $10.6 billion, is a significant milestone in the lithium sector, resulting in the formation of the world’s third-largest lithium corporation.

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