Case Study: The Economic Impact of Supply Disruptions Affecting Critical Materials
The Netherlands Materials Observatory (NMO) conducted a case study (in Dutch) into the economic impact of supply disruptions affecting critical materials. The study examined whether investors recognise supply risks and immediately factor them into their valuation of companies. As an example, the study looked at the rare earth metals crisis between China and Japan in 2010, when China unexpectedly halted exports of rare earth elements (REEs) to Japan.
The export ban followed a diplomatic incident and came as a surprise to market participants. This ‘natural experiment’ makes this event suitable for analysing whether investors distinguish between companies that are heavily reliant on REEs and those that are not. If the market prices in supply risks as a measurable risk premium, companies have an intrinsic financial incentive to reduce those dependencies.
Case study methodology
The case study compares share returns of Japanese listed companies. Using a so-called difference-in-differences analysis, the difference in share price performance before and after the embargo was determined between REE-dependent companies and a control group of less dependent companies. This allows the effect of the supply shock to be better distinguished from general market movements.
Results
The analysis shows that REE-dependent companies experienced an additional decline in value of approximately 2% around the time of the embargo compared to the control group. It is striking that this price reaction was already visible before the international media reported widely on the embargo. This suggests that financial markets can react early to tensions in critical supply chains and may serve as an additional signal.
The results make it clear that supply risks relating to critical materials are not only operationally relevant but also have financial consequences. Investors adjust their valuations when dependencies become apparent. This creates an incentive for companies to mitigate risks, for example through strategic stockpiling or by diversifying their suppliers. When formulating policy on critical raw materials, it is important to take this market incentive into account: if the government mitigates risks without monitoring this incentive, companies will invest less in diversification and substitution than they otherwise would.
The full report contains the detailed rationale, methodology and regression analysis.
Download the case study (in Dutch): 'Quantifying the economic impact of supply disruptions affecting critical materials (pdf, 134 kB)'