Increasing geopolitical fragmentation putting energy transition at risk, IMF warns

Geopolitical fragmentation could send the price of crucial commodities soaring, putting further pressure on the global economy’s net zero targets, the International Monetary Fund (IMF) has said.

In a bleak warning, the IMF cautioned that the geographic concentration of key minerals made commodities markets highly vulnerable to political tensions. 

Increasing tensions between China and the West would likely mean that prices would rise significantly. 

“Critical minerals for the energy transition and some highly traded agricultural goods are highly vulnerable in the event of fragmentation,” the IMF warned. 

Commodities markets have faced severe disruption from the Russian invasion of Ukraine, contributing to the wave of inflation which took off in many advanced economies. 

The report noted that production is hard to relocate, while on the demand side it is difficult to substitute critical minerals in the short term. 

Although prices have since stabilised, relations between major powers have in many cases deteriorated. For example, many Western countries have implemented policies to reshore supply chains while China has imposed restrictions on the exportation of key minerals. 

Moving to trading based around regional blocs would also increase price volatility, the IMF said, as there would be fewer buffers against supply and demand shocks. 

“Further fragmentation of commodity markets could deliver an additional blow in an already challenging environment of slow global growth, tight financial conditions, and high debt, a blow that would be particularly harsh for some of the most vulnerable economies,” the report warned.

With the potential for rising costs to jeopardise the world’s net zero targets, the IMF stressed that advanced economies should attempt to keep commodities trade open. 

“The threat of derailing the global green energy transition should give advanced economies pause,” the report said. 

China is a global frontrunner in both the extraction of critical minerals for the green transition and also in processing – vital for making minerals a marketable product. 

This includes refining 68 per cent of nickel, 40 per cent of copper, 59 per cent of lithium and 73 per cent of cobalt, according to US think tank the Brookings Institution. 

These minerals are essential in production of renewable energy technologies and electric vehicle batteries.

This is a challenge, with the IMF noting that measures to restrict commodity markets last year surged in comparison to other goods following Russia’s invasion of Ukraine.