Coils of steel sit at Stelco's Hamilton Works in Hamilton, Ont.COLE BURSTON/AFP/Getty Images
Bentley Allan is associate professor of political science at Johns Hopkins University and vice-president of future economy at the Transition Accelerator, a Canadian non-profit.
Last month, the United States Department of Defense struck a groundbreaking deal with MP Materials that should serve as a wake-up call for Canada’s approach to critical minerals. While Ottawa has been talking about critical minerals for years, Washington recently deployed a multibillion-dollar arrangement that could fundamentally reshape global supply chains. Canada needs to pay attention – and act.
The MP Materials partnership represents more than just another government investment in mining. It’s a sophisticated policy innovation that addresses the core challenge plaguing Western critical minerals development: How do you compete against China’s state-subsidized producers who can operate at losses to maintain market control?
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The answer, it turns out, isn’t just more grants or loan guarantees. It’s a mechanism called a contract for difference, borrowed from energy markets, that guarantees Las Vegas-based MP Materials a price floor of US$110 per kilogram for rare earth elements while allowing the government to capture 30 per cent of any upside if prices exceed that threshold. Combined with a 15-per-cent equity stake and cost-plus contracts for magnet manufacturing, the deal provides the revenue certainty needed to justify massive capital investments in a market where China routinely manipulates prices.
It’s precisely the kind of strategic intervention that Canada’s fragmented approach to critical minerals has failed to deliver. We’ve announced various funds, tax incentives and infrastructure commitments, but nothing that directly addresses the fundamental investment challenge: price uncertainty. Mining companies won’t invest billions in Canadian projects if they can’t be confident about long-term revenues, especially when competing against subsidized Chinese production.
Canada has unique advantages. Our mining sector is world-class, our regulatory framework is sophisticated, and we have the breadth of mineral resources necessary to create geopolitical leverage for ourselves and our allies. Canada can compete in global critical minerals markets and build economic sovereignty if we mobilize the policy tools necessary to seize our advantage.
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The MP Materials deal offers a template, but replicating it in Canada requires institutional creativity. We need a contracting entity capable of writing and managing these complex agreements. A dedicated critical minerals company with the mandate and expertise required might be ideal in the long-run, but that will take time, and we need to act now. Instead, the government should explore whether existing defence or procurement entities could write such contracts under existing authorities.
The fiscal pathway is clearer than it appears. NATO’s 5-per-cent defence spending commitment is split into 3.5 per cent for core defence and 1.5 per cent for civilian infrastructure and the defence industrial base. Critical minerals should count toward the core 3.5 per cent as these materials are essential for defence systems. Either way, a sizable critical minerals pricing fund could be established within Canada’s expanded defence budget.
The international dimension matters too. To truly contest China’s dominance, Canada will need to work with allies and partners. Within the G7 Critical Minerals Action Plan, Canada should actively promote contract-for-difference mechanisms as a co-ordinated approach to breaking China’s market dominance. If allied nations adopt similar price floor arrangements for mining projects within the club, they will effectively contest China’s geopolitical leverage while preventing a race to the bottom in government subsidies.
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The MP Materials deal isn’t perfect. The US$110 price floor likely exceeds what was necessary to achieve the strategic objective, and the 30-per-cent government upside share may be too generous to the private sector. But these are lessons for improvement, not arguments against action.
The broader lesson is clear: traditional government support mechanisms such as tax incentives and grants are insufficient when competing against state-directed market manipulation. Market-based mechanisms like contracts for difference provide the revenue certainty needed to catalyze investment while maintaining competitive incentives and allowing governments to capture upside.
Canada has spent years talking about critical minerals as a strategic opportunity. The MP Materials deal shows what strategic action actually looks like. The question now is whether Ottawa will learn from Washington’s innovation or continue to rely on incremental measures that fail to address the fundamental challenge.
But individual contracts, no matter how well designed, won’t be enough. These mechanisms need to be integrated into a larger nation-building strategy for critical minerals that ensures projects add up to more than the sum of their parts – creating integrated supply chains, strategic infrastructure and the industrial capacity that will define Canada’s economic sovereignty for decades to come.