Regional Market Dynamics: A Marginal Pricing Approach to Metals Market Modeling

Abstract

The transition to renewable energy technologies depends heavily on critical minerals, such as copper, lithium, and nickel. Experts predict that the demand for copper will soon exceed current supply, potentially creating a substantial supply-demand gap in the coming decades. To mitigate this gap, governments worldwide have implemented policies aimed at encouraging the exploration and development of new mines. Additionally, some governments have introduced or proposed policies, such as subsidies and tariffs, to further incentivize and expand the production of domestic copper. These policies may lead to changes in the distribution of the copper supply chain and differences in regional prices of copper. This thesis builds upon an existing model of critical minerals supply evolution that integrates price feedback and mine operation decisions by expanding the model’s capacity to analyze short-run supply risks. This thesis introduces a “marginal pricing” approach to metals supply modeling where mine-level opening, closing, and production decisions are made based on the “margin” between the current commodity price and the mine’s operating and capital costs. “Marginal pricing” can be applied to analyze various short-run scenarios, particularly public policies aimed at incentivizing domestic sourcing of critical materials.