China’s muted demand and deflation weigh on global outlook for critical minerals

When the world signed the Paris Agreement in 2016 the outlook for critical minerals was rosy. It marked global consensus of the importance of net zero ambitions.

This had a direct effect on forecast demand for key critical minerals. Modelling undertaken by the International Energy Agency in 2020 showed that we would go from needing about 7-million tonnes of critical minerals in 2020 to nearly 150-million tonnes by 2030.

Mining companies saw sunshine in the years to come. At the beginning of 2021 JPMorgan analysts took a bullish view on minerals and metals, suggesting the world had likely entered its fifth commodity supercycle since the early 1900s.

A supercycle spans at least 10 years. Yet today, cobalt, nickel, and lithium prices are near four-year lows. The industry did not yet see the three exogenous shocks that were just around the corner that would have a big effect on global minerals demand and depress private sector mining activity. 

First there was the Covid-19 pandemic. As countries pumped unprecedented fiscal support into businesses and households we saw people buy more, which increased demand and prices — triggering inflation.

In response, central banks around the world raised interest rates. The Federal Reserve raised rates 11 times in 2022 and 2023 in an effort to rein in inflation. When interest rates are high individuals buy fewer minerals-intensive goods. 

The effect of rate hikes on electric vehicles (EVs) has been particularly profound. Until March 2023 dealerships in the US sold EVs faster than petrol-powered vehicles. When the Fed increased rates another 25 basis points to 5%, internal combustion engine vehicles began selling faster than EVs. By the end of 2023 an EV took an average of nearly 70 days for a dealership to sell, compared with 42 days for a petrol-powered vehicle.

Then came the slowdown in the Chinese economy. Five years ago many of us thought the economy was too big to fail. China’s economic growth over the past two decades has been remarkable. In 2000-09 GDP growth rates ranged at 5.6%- 13.6%. It was the biggest market for the world’s base metals.

But China’s economy has slowed considerably and is facing structural economic challenges, including high levels of local government debt, a collapsing real estate market and high youth unemployment. In 2022 China’s economy grew just 3% — the second lowest rate since 1991.

In 2023 China’s central bank cut interest rates twice in a three-month period to encourage people to spend money. But data from January 2024 showed that the economy is suffering from deflation — consumer prices experienced the largest drop in more than 14 years. And in April credit ratings agency Fitch downgraded its outlook on China from “neutral” to “negative”.

China’s economy is no longer the world’s biggest engine of growth. Instead, muted demand and deflation could spill over to the global economy and suppress demand for mineral-intensive goods. The IMF recently raised a red flag over China’s fiscal situation and noted that its economic outlook was tilted to the downside. 

Finally, there has been market manipulation. Despite low demand Chinese government-backed firms are ramping up production, which is putting downward pressure on commodities prices and forcing Western firms to close.

For example, Indonesia’s nickel production has risen rapidly and is contributing to a global surplus and a resulting decline in prices. In 2021-22 Indonesia’s nickel production increased 48% and in 2022-23 it increased by another 29%. This oversupply forced the closure of nickel mines in places such as Australia and New Caledonia. 

This brings us to our present situation: we recognise that establishing resilient and secure mineral supply chains is crucial for national security, energy stability and economic competitiveness. However, the private sector is hesitant due to the price impact of these shocks while private mining sector activity is nearing a four-year low.