Building Supply Chain Resilience for the Energy Transition

Supply chains still struggling with pandemic-related disruptions may be in for yet more challenges. The Russian invasion of Ukraine presents numerous considerations for the involved and neighboring nations, but even private organizations far from the fighting will feel economic effects of the military actions and ensuing sanctions. Supply disruptions, or at least price shocks, are persisting in energy as well as precious metals like palladium, which are among the Russian Federation’s primary exports. Such disruptions highlight the need for organizations of all sizes to maintain resilient supply lines with N+1 – or greater – redundancies to secure supplies of mission-critical materials and components.

Geopolitical Instability Is an Underpriced Risk

While many private organizations will not be able to bear the expense of maintaining, for example, backup palladium mines, the strategic importance of some natural resources rises to the level of national security. Many countries have long recognized the value in maintaining strategic reserves of oil, along with similar reserves of other essential commodities like grain, uranium, helium, and medical supplies. But many industries and most governments are increasingly reliant on electronics and high efficiency batteries. Maintaining energy security while simultaneously pursuing decarbonization remain key objectives for many and can be attained by increasingly distributed energy production and storage as described further in this Guidehouse Insights report. 

But batteries and electronics are especially susceptible to supply chain disruptions as the requisite natural resources are not uniformly distributed around the globe. China, for example, controls almost 40% of the known deposits of rare earth minerals (REMs) and was responsible for more than 80% of global REM production in 2019. REMs, such as neodymium, indium, and platinum, are critical for manufacturing electronics and high capacity batteries. The number of unique materials required for even simple electronics means supply chains are obligately global, and thus exceptionally vulnerable to disruption. Participants in the energy transition may soon find themselves in a double bind, caught between material shortages that hamper production and rising energy prices that strain the bottom line while also driving demand. With the US, Japan, Taiwan, and others poised to effectively cut off Russia's access to semiconductors, Russian industry and government alike risk losing the ability to produce electronics altogether. Russia and Ukraine combined represent 35% of the European Union’s oil and gas imports and more than a quarter of the global supplies of palladium and wheat, further threatening global price stability in these commodities. 

Relying on continuity in global supply chains for mission-critical materials is a risk that has been severely underpriced. Raw materials critical to key economic and military functions, such as semiconductors, REMs, and certain precious metals, are overdue for inclusion in national strategic reserves of their own. The state of the global REM market has prompted public and private organizations to earnestly explore other means to secure reserves of REMS, even if that means looking beyond Earth. This Guidehouse Insights report describes these efforts in more detail. Guidehouse Insights believes both governments and private enterprises should identify the materials and processes in their supply chains that are both mission-critical and vulnerable to disruption by geopolitical instability. In the absence of national reserves, vendors, manufacturers, and local governments should reassess the value they assign to geopolitical risks and consider building up their own reserves of keystone materials with the expectation of ongoing geopolitical uncertainty.  Despite the carrying cost, retaining key physical reserves and domestic production capabilities can pay economic and strategic dividends when global supply chains experience shocks from conflict, pandemic, and financial sea changes.