The US Needs More than a Critical Minerals Stockpile, It Needs Market Infrastructure

Last month, Ganfeng Lithium, China’s largest lithium producer and refiner, announced plans to establish a $1.1 billion trading desk “to reduce the risk of market fluctuations” associated with its growing portfolio of international mining investments. By injecting liquidity into a Chinese market infrastructure, the move will likely deepen the country’s already dominant grip in the market and could threaten the US’ attempts to build a resilient supply chain for critical minerals. The development should prompt serious reflection among policymakers and industry leaders in the United States: it highlights the need to expand our toolkit to enhance our competitiveness in a sector crucial to the clean energy transition and national security.

The global critical minerals market is currently dominated by a few key players, particularly China. In 2023, China accounted for over 65% of global rare earth mineral production. It also leads in processing, refining over 35% of the world’s nickel, 58% of lithium, and 70% of cobalt. By directing supply and demand—China exerts considerable leverage over the market. This prominence is the result of strategic investments made over decades, demonstrating foresight in recognizing the future importance of these resources to numerous strategic sectors including energy and defense.

However, the Ganfeng announcement reveals another crucial aspect of China’s leadership: dominance of market infrastructure. As demand for these once-niche minerals skyrockets, the financial mechanisms for trading them become increasingly important. Market infrastructure, like physically-cleared benchmark contracts, is vital for building liquidity, ensuring price transparency, and mitigating volatility risks. This is the role that well-known benchmarks like Brent and West Texas Intermediate play in global oil markets.

Currently, for many critical minerals, including lithium and cobalt, the only physically-cleared benchmark contracts (a preferred hedge for producers) are on exchanges like the Guangzhou Futures Exchange (GZE). Cash-settled contracts exist but are also highly affected by Chinese supply dynamics and imperfect as hedging tools for producers.

The implications of this extend beyond China’s borders. Consider a lithium producer in Quebec supplying a U.S. electric vehicle manufacturer. Standard industry practice would be to index the contract price to a benchmark like the Fastmarkets Asia index. However, since this index is highly correlated with supply conditions in China, a price decrease arising from overcapacity in China drives down the contract value for the producer in Quebec, reducing revenue and threatening future investment.

With Ganfeng bringing liquidity to these existing financial markets, China’s control of the market infrastructure will only deepen. For the US to become less reliant on such a highly concentrated market, yes, it needs to have new supply come online and utilize tools like stockpiling in reserves. But also it needs to develop diverse, robust market mechanisms to ensure a free, stable, and fair market for all participants.

Fortunately, the United States has an opportunity to enhance its own competitiveness in the critical minerals sector. With growing private sector interest as demonstrated by the entry of Singapore-based exchange Abaxx into the battery metals sector, it is necessary now to take steps to build a more stable financial infrastructure less prone to the problems of overcapacity.

The federal government has tools at its disposal that could foster the development of liquid financial markets for critical commodities. Employ America previously proposed that the Department of Energy’s Loan Program Office (LPO) use its existing lending authority to support market-making activities in the commodities sector. By providing loan guarantees under its "Innovative Supply Chain Program," the LPO could enable the creation of a special-purpose vehicle (SPV) that would function as a trading desk, engaging in various market activities to help producers hedge against price shocks.

We have also proposed* that Congress reimagine the Strategic Petroleum Reserve as a “Strategic Resilience Reserve” (SRR). Modeled after the Federal Reserve’s approach to financial stability, the SRR would employ both preventative and reactive tools to stabilize commodity markets. Ex-ante measures could include long-term fixed-price contracts, establishing inventory minimums, and non-recourse lending to address underinvestment. If prices spike, the SRR could release stored reserves to end-users and sell put options to upstream producers. In periods of downside distress, the SRR could take excess supply off the market and provide financial support for additional storage or bridge capital for upstream participants. This dual approach of market stabilization and crisis mitigation would help ensure a self-regulating market response, maintaining a balance between supply and demand for volatile commodities like lithium. Importantly, as the Fed utilizes market interventions to stabilize the financial system, an SRR would utilize market infrastructure to execute commodity market stabilization. By trading financial instruments through new physically-cleared benchmark contracts, an SRR could provide the “startup capital” for market infrastructure less prone to external market challenges like localized supply gluts in China.

The time for action is now. The critical minerals sector is evolving rapidly, and the United States has an opportunity to play a leading role. By developing our own robust financial markets and trading mechanisms for these crucial resources, we can enhance our competitiveness, stabilize supply chains, and accelerate our transition to clean energy.

The stakes are significant. Our ability to meet climate goals, ensure national security, and maintain technological leadership in the 21st century all depend on securing a reliable and diverse supply of critical minerals. The Ganfeng announcement should serve as a catalyst for action. It’s time for the United States to step up and secure its position in this vital sector, not through confrontation but through innovation, investment, and strategic foresight.

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*This piece was co-authored with Daleep Singh prior to his rejoining the administration as Deputy National Security Adviser for International Economics.

Arnab Datta is Managing Director of Policy Implementation at Employ America. 

Ashley George is a policy associate at Employ America.