Critical minerals: The new oil

0:00Hi, everybody. It's Ronnie. I'm here in the studio in New York. Welcome to the Barclays Brief. It's Monday of Thanksgiving week, but after last week's market action, I don't think we're going to get such a quiet Thanksgiving week in markets. I want to welcome our guest. Zornitsa Todorova is our head of thick thematic research. Zornitsa, welcome to the Barclays Brief. Thanks so much for having me today. It looks like your week was pretty wild. So tell me about it, Ronnie. What's going on? Oh, it was very wild. Thanks for bringing it up. We usually just jump right into our topic here, but why don't I spend 60 seconds on my market thoughts?

0:31I think that this drawdown has really pierced confidence. And I think that the AI trade and the ROI of AI is now pretty firmly in question. And I think that the trees grow to the sky mentality has been interrupted and we're at risk. I think the retail investors are very exposed. Their percentage of stock market ownership is at the highs. Margin debt is at the highs. And while I think it's going to be volatile in both directions, the risk of a major correction here feels high to me. So I think it's a time for caution. But now let's get back to our topic. Zornitsa, you just published an independent research report looking at the critical mineral space.

1:04You've called critical minerals the unsung heroes of the modern world and the new oil. Those are powerful descriptors. Can you explain what critical minerals are and why this topic is just now hitting the mainstream? When we're talking about critical minerals, we are not just ticking off a periodic table wishlist. We are talking about the elements that quietly keep the modern world running. I like to think of these elements as the unsung heroes because they power everything from autos to chips to consumer tech and even the AI centers that are so important right now. There are really two main groups to know about.

1:38The first one is what I call the clanks, short for cobalt, lithium, aluminium, nickel and copper. And the second group is rare earths. And taken together, these elements are so critical, not only because they are, let's say, part of the foam battery, but because they are the backbone of pretty much every bit of infrastructure that we now call strategic. And as these elements become a greater part of modern infrastructure, they are also becoming a bigger topic of conversation today. And I think this is where things get really interesting because the supply of these minerals is not evenly sprinkled around the grope.

2:16In fact, the supply chains of these minerals are so incredibly concentrated that if you drive them on a map, you'll find that they are a handful of countries which are holding all the cards. So really, to me, critical minerals almost sounds like a new kind of global supply chain chess, one where the stakes are rising really fast and the strategies are constantly moving. Well, it felt like the stakes got a lot higher a few months back when the spot prices tripled. Can you tell us why that happened? That's right. Prices for rare earths outside of China absolutely soared this year. And the reason is because China rolled out a series of export restrictions.

2:53It started with seven rare earth elements and then it added more to the list. And the market quite understandably got spooked because China controls about 90 % of the global supply. And so suddenly everyone is realizing just how much power comes from holding the keys to these critical materials. And for what industries is this important? Honestly, it's very hard to find an industry that doesn't rely on these minerals, especially rare earths. They're kind of the invisible scaffolding behind so much of what we take for granted in modern life. Take consumer tech and electronics. Rare earth magnets are really the secret sauce inside your smartphone.

3:32Without them, smartphones wouldn't be smart, wouldn't be quick, and would be quite chunky, actually, and extremely uncomfortable to carry around. Minerals are in data centers, running AI models, and pretty much every gadget you can't live without. And also, let's not forget defense. This is where things get really strategic. Let's spend more time on that. Defense is a big topic for everybody in markets right now. How do critical minerals and rare earths permeate defense? So I think the important thing to note here is that defense tech today isn't just about the hardware anymore. Defense tech is getting smarter, it's getting more digital, and a lot more AI-driven.

4:08And that shift means even heavier reliance on rare earths. And what I think most people don't realize is just how packed with rare earths modern defense technology is. Take an F-35 fighter jet, for example. It needs about 400 kilograms of rare earths. A submarine needs two tons, and sometimes it might need up to four tons. And when you think about it, that's an incredible amount of rare earth materials for a single piece of equipment. And these dependencies are not going away anytime soon because defense spending is only going to increase from here. And actually, last year, global defense budgets hit a record of$2.7 trillion.

4:45And according to some forecasts, we could be looking at defense spending between$4 and$6 trillion by 2045. That means heightened demand for these materials. And all of a sudden, the conversation is really about how do we secure supply chains? How do we make sure that the dependencies are reduced? So put differently, it's not just about who has the best technology, but also who has the materials to build these infrastructures. So you mentioned who holds the cards and some of these difficulties in supply chains, but also there's a lot of reliance here. How will the West continue to access these critical materials?

5:19I think the strategies are going to shift in the next couple of years. I think we're going to see capacity for rare processing go live outside of China in a couple of years time. But I still think that a large portion of the demand that the West needs in terms of rare earths and other critical minerals is still going to come from China because China has a very strong position in the market. And I think this is something that people don't realize or at least don't realize that it didn't happen overnight. What's overlooked is that this advantage comes from deliberate investment in infrastructure and technology and talent.

5:54And it's just now that we're seeing how much leverage that kind of strategic patience can deliver on the global geopolitical stage. Seems like a lot of strategic vulnerabilities. What can go wrong here? If this were to go really wrong for a lot of these industries and defense specifically, what would that look like? I think it's always very tricky when one player has so much strategic importance, such as China in this case. And this could mean that restrictions could cause prices to increase, as we've seen this year. It could also mean disruptions in terms of the steady flow of these minerals into industries and just a lot of uncertainty about the growth prospects around AI and all the other sectors that are dependent on it.

6:35And that's why I think the West and in particular the US is really going at speed to make sure that these dependencies are reduced. The US is investing a lot in terms of technology, signing preferential deals with countries that have access to the raw materials and also pouring money into technologies. So I think all that is going to come together in a couple of years' time. So there's a clear desire by the West to decouple from China here. Is that realistic? And on what timeframe? I think it's realistic, but up to a certain point. And the big caveat here is really on the timeline. I think that with all of the investment that is going on in the space, I see how capacity could go live in the next three to five years, but it will be some capacity.

7:18I think the key word here is really some. And that's because China has had such a massive head start. And even as its share drops from maybe the 90 % that we currently see to maybe 70 % by the 2040s, it will still be the dominant player. And I think, yes, so progress is coming, but China's early and deliberate and steady investment in this space means that it's not going to step out of the spotlight anytime soon. Feels like this is something we're going to be talking about for a long time to come. Zornitsa, it was great to have you here in the studio. This was very interesting and eye-opening for me, and I'm sure it will be for our listeners.

7:53Thanks again. Right now, markets are questioning if we're in an AI bubble, and this topic of critical minerals and their strategic importance feels very under the radar to me. Having spent time with Zornitsa today, I'm sure that this is going to be a huge theme in 2026. I don't think markets are focused enough on it, so if you want to read more from Zornitsa, the links are in the show notes. And don't forget to hit subscribe wherever you're listening to get notified every time a new episode comes out.