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Trade in transition

By Shanella Rajanayagam, Trade Economist, and James Pomeroy, Global Economist

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  • As the world shifts to cleaner forms of energy…
  • …some minerals will see demand surge…
  • …having many implications for trade flows and policy

How clean energy could transform global trade

As we have argued before in our research on gamechangers, the shape of the global economy is evolving quickly. One of the major drivers is climate change – both because of its impact, and the steps being taken by governments, businesses, and individuals to tackle it. A global energy transition is underway, with the world shifting towards cleaner fuels for grid energy and transport.

This transition looks set to have a clear impact on global trade, with materials that are needed to build solar panels, wind turbines, and electric vehicles set to see a huge leap in demand in the coming years. By 2040, the world may need four times more critical minerals than it does today, with emerging economy exporters seemingly well placed to benefit. In our recent report, we look at who sells and who buys the key materials that will gain (or lose) prominence in this shifting world.

4x
Anticipated growth in demand for critical minerals by 2040 (International Energy Agency)
1.2%
Anticipated share of critical minerals in world trade by 2040 (HSBC Global Research)

Many commodities that you may never have even heard of will be at the centre of this shift. While lithium and magnesium may have grabbed headlines in recent years, minerals such as selenium (key for solar panels) or molybdenum (used in wind turbine production) will also have a key role to play.

Mainland Chinese production is hugely important for many of these commodities. For example, c.40% of the world’s selenium comes from there, but if trade patterns evolve, producers such as Japan, Germany and the Philippines could have big roles to play.

Some commodities that we already know plenty about will continue to be traded extensively. Copper, a vital component for electrical wiring, is unlikely to see demand diminish any time soon – good news for Chile, Peru, and Indonesia – while lithium has acted as a huge boost for Chile and Australia already and could support exports from other economies across Latin America.

Precious metals have already propped up exports in South Africa, while markets such as Zambia and DR Congo have large reserves of copper, with the latter home to more than half of the world’s cobalt reserves. Although taken together key energy transition minerals currently account for around 0.5% of global trade, their role in key supply chains could well mean their economic impact is greater than trade figures alone might suggest. And, assuming trade roughly follows demand growth, we estimate the share of these minerals in world trade could rise to around 1.2% by 2040.

Indonesia could well become the dominant producer of EV metals.

This means that exporters of transition critical minerals will be more important in terms of driving global trade, and their geopolitical profile could also rise. Indonesia, for example, could well become the dominant producer of EV metals, while Malaysia could benefit from rare earths investments, though environmental and innovation factors will also need to be considered.

This raises questions surrounding trade policy. Some economies have been keen to limit exports of raw materials (such as Indonesia with nickel) as they seek to move up the value chain. Mainland China has put export controls on some key minerals, too. Rising protectionism along with supply chain disruptions has increased pressure to diversify supply chains for these minerals – with ‘rare earths’ from the Scandinavian seabed a potentially important development for European businesses.

But for the next decade or so, mining and refining of these key minerals look set to remain very concentrated, meaning there will be a key role for trade deals to facilitate supply. The Minerals Security Partnership, for example, among 15 economies including the EU, US, UK, and India, aims to catalyse investment in responsible mining, processing and recycling of critical minerals, while the US and EU have been striking separate bilateral pacts on critical minerals with various partners. Therefore, as the world continues to transition to clean energy, trade will play an important role in meeting critical minerals needs.

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