When investors think of political risk, or the chance that an investment return can be substantially affected by political, including policy change, the United States usually is not top of mind. However, actions by the Trump and now Biden administrations to remake global supply chains have significantly increased government intervention in the U.S. economy and this increases political risk. Repeated and increasing use of the Korean War era Defense Production Act (DPA), most recently for baby formula production and distribution, and the Biden administration’s pivot toward industrial planning, especially through the Inflation Reduction Act of 2022, intensifies the government policy impact on corporate profitability. Many questions about the Act’s implementation remain unanswered and this raises policy unpredictability and threatens investment returns. A focus on supply chain diversification, rather than “reshoring,” can lower this risk.
A priority area for government intervention concerns “transition” minerals, i.e., minerals needed for lithium-ion batteries, solar panels, and wind turbines. The initial government reaction to recent minerals supply disruptions was to call for “reshoring,” i.e., returning more mining operations to the United States. This policy was reinforced by a new sensitivity to China’s obvious dominance of multiple mineral supply chains. According to the U.S. Geological Survey, the U.S. is 100% import dependent for 17 mineral commodities and at least 50% import dependent for an additional 30. Twenty-four of these minerals come at least partially, and in some cases near exclusively, from China. In order to reduce this national security threat and expedite the energy transition, the Biden administration issued a Presidential Determination invoking the DPA for minerals. The Directive provides federal funding for increasing production at existing facilities, upgrading mine productivity and safety arrangements, and undertaking future production feasibility studies.
Unfortunately, use of the DPA is unlikely to raise substantially U.S. minerals production and it increases political risk for investors. Unlike building a semiconductor or pharmaceutical plant, increasing domestic minerals production is limited both by the U.S.’s geologic endowment, and by implacable environmental resistance. Reserves of many transition minerals especially nickel and cobalt are not naturally abundant in the United States. Substantial increases in the domestic production of these minerals is geologically constrained. Other minerals such as lithium, bauxite, copper, and various Rare Earth Elements (REE) are more abundant, but substantially increased domestic production is unlikely given unyielding environmental opposition.
Short of wholesale reform of the relevant legislation, it is difficult to see how a large increase in domestic mining is possible. A substantial and more balanced rewrite of the General Mining Act of 1872 would need to override scores of existing laws and regulations, and this itself would be subject to years of litigation. Perhaps as a hedge against the difficulty of increasing U.S. mining, the Biden administration also has called for increased foreign mining, but only from allied or trusted countries.
Treasury Secretary Janet Yellen recently said that the United States “…cannot allow countries to use their market position in key raw materials…to have the power to disrupt our economy or exercise unwanted geopolitical leverage.” She saw “friend-shoring,” as way to “…lower the risks to our economy …” In practices this means mining projects in select foreign jurisdictions, particularly Canada and Australia, will become increasingly eligible for various forms of U.S. governmental assistance, including grants and subsidized loans. Invariably and appropriately with this high government involvement will come greater discretion as to what type of foreign companies should receive support, or even be allowed to operate in these jurisdictions. The U.S. goal will be to stop state-owned companies that are hostile to U.S. interests and values from embedding themselves in the reconstituted supply chain.
From an investor perspective, companies that are primarily developing a single U.S. minerals site, such as Piedmont Lithium or Lithium America are substantially risker than multi-jurisdictional miners such as Albemarle or Sociedad Quimica. Since there are so many smaller U.S. start-up mining companies some are bound to eventually succeed, but knowing which ones is heavily politically determined. Favoring start-ups in Canada or Australia over the U.S. companies may be a better strategy. Focusing on companies better aligned with U.S. government policies, such as Lynas Rare Earths also is less politically speculative. Given the breadth of their global operations, the larger diversified mining companies such as Glencore or Anglo-American also are less exposed to U.S. political risk, even if they may have U.S.-based projects.
The U.S. government is slowly realizing that “reshoring” domestic production and processing of critical minerals is an inadequate and unrealistic strategy for securing minerals security. Ultimately, supply chain diversification that emphasizes foreign, publicly traded corporations over state-owned enterprises from foreign rivals is the key to strengthening minerals supply chains. Investors can and should use this awareness to their advantage when investing in the sector.
Jonathan Chanis manages New Tide Asset Management, LLC, a company investing in commodities and listed equity. He formerly taught at Columbia University and worked at several financial firms, including Caxton, Citigroup, and Goldman Sachs.
