Moving a factory closer does not settle the return

themePublished 19 October 20262 min readequities

Key points

• The IEA says refining capital costs outside the dominant supplier are 20 percent to more than 150 percent higher, and operating costs about 50 percent higher on average.
• A resilience premium can be rational for the buyer and still leave the new plant short of a commercial return.
• No subsidy total or manufacturing-construction census is stated.

What is going on

The cost ranges are in the executive summary, and they are attributed to equipment, construction, feedstock and energy, before skills and permitting. The summary also says public finance is being used to narrow project risk, with commitments in advanced economies around 65 billion dollars in 2025, and that disbursement is the unresolved step. Separately, it says critical minerals are often a small share of a finished product's price, which is why a buyer might absorb a higher mineral cost. Copper is an exception it flags inside equipment: 10 to 15 percent of transformer and cable prices. A small share of a car is a different bargaining problem from a large share of a cable.

Why it matters

If the new plant costs more to build and more to run, someone pays the difference. The candidates are the taxpayer, the customer, or the owner's return. A grant reduces the owner's capital but does not, by itself, fix a 50 percent operating-cost gap. A long offtake can fix volume and still fix a price that fails to cover that cost. The IEA calls the extra cost of diversified supply a security premium, a form of insurance. Insurance has a price. Paying it is not evidence that the insured asset earns more than its hurdle rate.

What to watch

The commercial test is production from the higher-cost site, at a disclosed utilisation, under a contract that is being honoured. Announced ground-breakings fail that test. So do commitments that have not been disbursed. Trade restrictions can make the expensive plant viable by closing the cheap alternative, which is a political fact and a fragile one if the restriction is lifted.

Risks

Subsidies can be revised. A plant sized for a policy can be too large for commercial demand. Labour and power, which the IEA cites as cost drivers, can move against the project after the capital is sunk. This note does not claim that any announced factory will, or will not, earn its cost of capital.

Policy, the building and the product

Industrial policy can change location. It does not repeal depreciation. A factory that takes five years to build starts earning against a cost of capital that was set at the financing, not at the ribbon-cutting. Logistics can improve with proximity and worsen if the inputs still travel from the old centre. The mineral case is simply the one this desk can cite with ranges.