Critical materials markets resilient against Deepseek disruption and U.S. policy rollbacks

China is quickly emerging as the global leader in future clean technology supply chains, surpassing the U.S. in energy transition investments in 2024. This significant gap in investment is expected to widen as a result of the new U.S. administration’s policy stances. DeepSeek, a Chinese startup, has introduced a disruptive “cheap AI” model that has raised questions about the U.S.’s traditional approach to investment-heavy AI development.

While the U.S. has historically favored heavy investments in artificial intelligence development, the emergence of DeepSeek’s cost-effective AI model suggests that efficiency may increase future demand for computing infrastructure and data centers. However, this efficiency may also lead to higher overall electricity consumption due to quicker and wider adoption of AI technologies and increased demand for computing infrastructure.

Tariffs and trade wars have had a disruptive effect on critical materials markets, causing resource nationalism and reorganizing supply chains. While price fluctuations resulting from these disruptions may initially slow production timelines, they can foster research and development, ultimately leading to important breakthroughs in the industry.

In January, the Nasdaq Sprott Critical Materials™ Index experienced a 2.65% rise, bouncing back from oversold conditions in December 2024. The market’s performance in January was marked by volatility stemming from various factors. China’s economic data initially indicated weakness at the beginning of the month, but expectations of government stimulus helped offset concerns. Higher energy prices due to new sanctions on Russian oil and winter weather, as well as the potential economic growth spurred by the new U.S. administration’s policies, contributed to market dynamics. Additionally, uncertainties surrounding tariffs were temporarily calmed by a pause announced by the U.S. administration.

Amidst volatile market conditions, critical materials have shown resilience beyond the surface. The entrance of DeepSeek into the AI market caused a sell-off in U.S. AI and critical minerals alongside derivative plays. Despite global market volatility triggered by tariff announcements, critical materials have remained relatively steady.

The electric vehicle (EV) market continues to grow, with China leading global production and market penetration. While the U.S. faces policy uncertainties, major automakers remain committed to their EV strategies due to promising business fundamentals. Despite potential challenges, factors such as technological advancements, environmental awareness, and decreasing total cost of EV ownership suggest a continued transition towards EVs, albeit at varying speeds across regions.

China’s substantial investments in energy transition surpass those of the U.S. and even the EU. Figures show that China invested significantly more, both in total amounts and as a percentage of GDP, demonstrating a strong commitment to clean technology development. This data indicates a widening gap in energy transition investments between China and the U.S., further emphasizing China’s leadership in this area.