The Threat to Clean Energy in the US

Experts from our research team discuss how tensions with China could limit US access to essential technologies and minerals.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research.

Ariana Salvatore: And I'm Ariana Salvatore from the US Public Policy Research Team.

Michael Zezas: And on this episode of the podcast, we'll discuss how tensions in the US-China economic relationship could impact US attempts to transition to clean energy.

It's Thursday, April 4th at 10am in New York.

Ariana, in past episodes, I've talked about governments around the world really pushing for a transition to clean energy, putting resources into moving away from fossil fuels and moving towards more environmentally friendly alternatives. But this transition won't be easy. And I wanted to discuss with you one challenge in the US that perhaps isn't fully appreciated. This is the tension between US climate goals and the goal of reducing economic links with China. So, let's start there.

What's our outlook for tensions in the near term?

Ariana Salvatore: So, first off, to your point, the world needs over two times the current annual supply of several key minerals to meet global climate pledges by 2030. However, China is a dominant player in upstream, midstream, and downstream activities related to many of the required minerals.

So, obviously, as you mentioned, trade tensions play a major role in the US ability to acquire those materials. We think friction between the US and China has been relatively controlled in recent years; but we also think there are a couple factors that could possibly change that on the horizon.

First, China's over-invested in excess manufacturing capacity at a time when domestic demand is weak, driving the release of extra supply to the rest of the world at very low prices. That, of course, impacts the ability of non-Chinese players to compete. And second, obviously a large focus of ours is the US election cycle, which in general tends to bring out the hawk in both Democrats and Republicans alike when it comes to China policy.

Michael Zezas: Right. So, all of that is to say there's a real possibility that these tensions could escalate again. What might that look like from a policy perspective?

Ariana Salvatore: Well, as we established before, both parties are clearly interested in policies that would build barriers protecting technologies critical to US economic and national security. These could manifest through things like additional tariffs, as well as incremental non-tariff barriers, or restrictions on Chinese goods via export controls.

Now, importantly, this could in turn cause China to act, as it has done in the recent past, by implementing export bans on minerals or related technology -- key to advancing President Biden's climate agenda, and over which China has a global dominant position.

Specifically on the mineral front. China dominates 98 per cent of global production of gallium, more than 90 per cent of the global refined natural graphite market, and more than 80 per cent of the global refined markets of both rare earths and lithium. So, we've noted that those minerals are at the highest risk of disruption from potential escalation intentions.

But Michael, from a market's perspective, are there any sectors that stand out as potential beneficiaries from this dynamic?

Michael Zezas: So, our research colleagues have flagged that traditional US autos would see mostly positive implications from this outcome as EV penetration would likely stagnate further in the event of higher trade tensions. Similarly, US metals and mining stocks would likely benefit on the back of increased support from the government for US production, as well as increased demand for locally sourced materials.

On the flip side, Ariana, any clear risks that our analysts are watching for?

Ariana Salvatore: Yeah, so a clear impact here would be in the clean tech sector, which faces the greatest risk of supply chain disruption in an environment with increasing trade barriers in the alternative energy space. And that's mainly a function of the severe dependencies that exist on China for battery hardware. Our analysts also flagged US large scale renewable energy developers for potential downside impacts in this scenario -- again, specifically due to their exposure to battery and solar panel supply chains, most of which stems from China domiciled industries.

Michael Zezas: Makes sense and clearly another reason we’ll have to keep tracking the US-China dynamic for investors. Ariana, thanks for taking the time to talk.

Ariana Salvatore: Great speaking with you Mike.

Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.