Academic journal article Research-Technology Management

Dealing with Shortages of Critical Materials: Concerned about Growing Supply Uncertainties, Firms Are Taking Various Actions to Anticipate and Plan for Critical Materials Shortages

Academic journal article Research-Technology Management

Dealing with Shortages of Critical Materials: Concerned about Growing Supply Uncertainties, Firms Are Taking Various Actions to Anticipate and Plan for Critical Materials Shortages

Article excerpt

Critical metals are high-value elements used in very small amounts that provide key functionality to technology products, such as smartphones, LED displays, and a wide variety of consumer products (Holliday, Harper, and Heber 2012). Examples include neodymium, which is a key alloy element in permanent magnets; rhenium, which is used as a strengthener in turbine blades; and tantalum, which is used for anodes in electric capacitors. These metals are crucial for the functioning of a technological society; their availability is a strategic issue for both industrial firms and nations. In addition to the consumer electronics that power much of the industrial economy, tanks, planes, missiles, heads-up displays, and a wide variety of military communication and munitions systems cannot function without critical metals. These elements are not only used in high-technology products; for example, didymium (a mixture of praseodymium and neodymium) has been used for over a century to color safety glass for glassblowing and blacksmithing.

Certainty of supply is a growing concern. As of this writing, China produces more than 95 percent of the world's rare earths (DOE 2011) and over 80 percent of the world's tungsten and magnesium (USGS 2013a, 2013b). Concentration in any one country or even geographic area is a concern for a variety of geopolitical, environmental, and logistical reasons. Furthermore, supply uncertainties and other factors have led to frequent price spikes. One company we talked to calculated that there were 10 occurrences in the last 20 years when the price of critical metals at least doubled. Eight of those were between 2004 and 2008. Price spikes occur as demand from new applications such as clean energy or consumer electronics outstrips supply and can be exacerbated by speculation or trade quotas. When prices fall, as they did in the fourth quarter of 2012, Chinese firms quickly respond by slashing production in an effort to stem price erosion (Burton 2012). There is no futures market or other mechanism to help firms manage these uncertainties. Government regulations also impact supply and demand, and hence prices (see "Government Actions," p. 19). These challenges are complicated by the fact that many industrial firms sell products with contract service agreements that can run 5-10 years or longer. This obligates the firms to absorb the risk of material price fluctuations throughout that time.

The risk can be difficult even to assess, as many industrial companies are system integrators: they are not purchasing the critical material itself but rather components containing the material. They rely on suppliers to deliver components and deal with material issues. This creates a disconnect between the industrial firm's responsibility for price risk and the supplier's responsibility for material procurement. The risk is difficult to mitigate because of the concentration of metal and alloy producers.

As concerns have grown about the availability and price of these critical metals, some firms have begun to take positive measures to assess and mitigate their risk. As part of an IRI Research-on-Research group study, we talked to firms in a range of industries about how they have identified and communicated the risk and likely impacts of critical metal shortages.

Method

To understand how firms deal with the shortage of critical metals, we held two roundtable discussions. We invited the R&D managers and supply-chain managers responsible for critical metals from each IRI member firms to join the discussions to explain how their firms are interrogating the supply chain to understand and mitigate risk related to the supply of critical materials. In addition, an informal meeting was held at the 2011 IRI Member Summit followed by workshops at the 2012 midwinter meeting, the 2012 Annual Meeting, and the 2012 Member Summit. Topics discussed included the methodology firms used to assess risk of material shortages, actions that firms took to address shortages, and how firms interacted with suppliers and customers over shortage issues. …

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