Critical minerals, not so long ago an exotic species of metals and minerals, is now a buzzword across academia, governments and industry. Increasingly, it’s an unchartered territory for some diplomats who must navigate the opaque waters of supply chains. Since the Western world has slowly arisen from its myopic slumber, geopolitics have been playing out in real time, with allied nations racing against the clock to form partnerships.
In the Anglosphere, emphasis has been placed on creating alternative and secure supply chains that exist outside of the current monopoly. For some nations, low-carbon and responsible supply chains are a box that must be ticked, others are driven purely by security of supply and protecting their defence capabilities. But what about the monopolies, how will they respond to increasing competition and future loss of market share?
Supply chain monopolisation
An extensive monopoly on certain critical minerals is held by China, primarily in the midstream, where the processing and refining of critical minerals happens – a step that adds significant value by separating critical miners from waste.
China is geologically endowed in, and dominates the global production of, rare-earth metals as well as gallium, tungsten, bismuth etc. The nation also strategically controls the midstream for key battery materials (extending to precursor materials, through to cell production) and other critical minerals.
Although China holds a tight grip on the existing monopoly, it is not the only nation that dominates critical minerals. Others include: South Africa – platinum, palladium, chromium and manganese; Indonesia – nickel; Brazil – niobium; USA – beryllium; and Democratic Republic of Congo – cobalt.
Despite this dominant production often being linked to geological endowment, alongside accessible cheap labour and government support, the refining for many of these critical minerals still primarily occurs in China.
Dominance of the midstream effectively controls both the upstream extraction, and, most significantly, the rest of the supply chain that follows. The miners are reliant on the rare-earth midstream to sell their offtake. The component manufacturers are reliant on interrupted supply of critical minerals. The electric vehicle (EV) makers are reliant on parts that arrive on time to keep profits margins insulated and customers satisfied.
Some manufacturers have been inking offtake agreements directly with miners, to ensure greater security, but this has not extended past a handful of battery and automakers, yet.
A brief history of China’s dominance
For decades, the Western world’s manufacturing sector operated in relative harmony with the Chinese ‘just-in-time’ supply chains. Manufacturers were able to secure their desired refined products on the very competitive spot market. Meanwhile, Western capability to process and refine, and in some nations also mine, dwindled rapidly. Cheap critical materials could be sourced hassle-free from China, and operations across the UK, EU, USA and Canada became less feasible.
Refiners and manufacturers could not resist the allure of lower operating costs and were enticed to relocate to China at the cost of handing over their technology and expertise – and subsequently leadership in mining, refining and the downstream. The green spectacles of ‘we’re not polluting our back yard’ filtered out the realities of how these critical minerals were produced, processed and refined, and governments could wash their hands of ‘dirty’ industries that the public increasingly protested against.
Whether by design, opportunism, or both, China had its eye on critical minerals from the 1960s. The critical minerals pursuit was accelerated in the late 70s by Deng Xiaoping’s ‘Reform and Open Up’ policy propelling China’s economy from agriculture to commodity and manufacture in the 80s.
It also opened up an opportunity for Western manufacturers to leverage China’s cheap workforce – a temptation that proved difficult to resist. China’s tactics slowly became more aggressive, including price manipulations to undermine feasibly of Western competitors, investing into strategic Western projects to secure offtake, and exploitation of frontier regions and developing nations (particularly in central and southern Africa) in exchange for building infrastructure.
Globalism proved itself in practice, until in 2010, China used rare-earth elements (REEs) as tools of diplomacy against Japan, ceasing exports.
Over a decade later, the US jet fighter F-35s saga hit the headlines, as China was reported to be mulling over REE magnets export bans to the US. The US has since placed restrictions on exports to the technology company, Huawei, citing concerns about national security and intellectual property theft. While Canada has recently led the way in ordering Chinese investors to divest from key critical mineral projects.
Nationalisation on the rise
Indonesia has also dabbled in the game of export bans, prohibiting the export of unprocessed nickel ore in 2014, and introducing domestic processing requirements, which came into effect at the start of 2020, that require businesses to process or purify the raw materials in Indonesia before export. The EU launched a challenge at the World Trade Organization (WTO) in 2019, citing harmful damage to its steel industry. The WTO ruled that Indonesia’s move was out of line with global trade rules.
Increasing risk of resource nationalism is now high on some governments’ agendas, and many investors’ minds. Nations extracting critical minerals are increasingly wishing to add more value to their economies by requiring companies to process and refine critical minerals prior to their export. This creates jobs, increases tax revenues, and lowers reliance on imports. This has particular appeal in developing nations, and in the Western world that is trying to wean itself off China, where the ‘capture of more downstream value’ is a common hymn of the governments and miners seeking greater independence and profits.
The open-door policy of critical minerals without borders is coming to an abrupt end. Latin America is mulling nationalisation and fiscal restrictions on the mining sector are following suit across Africa and Asia. Increased resource nationalism will reshape critical minerals supply chains away from any semblance of the free (used loosely given China’s monopoly) markets.
The reality is, however, that China’s grip of the market, expertise, technology, and ability to trade off environmental and human rights concerns for cheap production, cannot be rivalled by any single nation, unless that nation’s government is willing to subsidise the domestic production and/or manufacturers
are willing to pay a price premium in return for secure supply.
The latter has begun emerging among EV automakers, with the provision that the supply is not only secure but relatively responsible in contrast to the alternative. Many manufacturers still quote low vulnerability to supply chain shocks in their annual reports as they only use negligible amounts of raw materials – a rude awakening awaits them.
The Great Western Alliance et al
Over the past few years, the Anglosphere, namely Australia, Canada, the US and the EU, have been scrambling to get to grips with critical minerals supply chains and counter China’s dominance. Australia and Canada are leading on extraction, the US is creating attractive incentives (e.g. tax credits equal to 10% of the cost of production of eligable minerals produced in the US under the Inflation Reduction Act (IRA)) to entice the supply chain, and the EU has joined the party late but in style.
A joint announcement between President Biden and the President of the EU Commission, van der Leyen, has formalised the formation of a Great Western Alliance, which was preceded by the formation of the Minerals Security Partnership (MSP) that brought together like-minded governments around the table to discuss how they can work together to counter China.
The marriage of convenience between the EU and the US will enable the EU to reap the benefits of the IRA – which has already been attracting UK and European original equipment manufacturers (OEMs) to the US – and open up US access to the EU market.
The US-EU partnership will give rise to a ‘buyers club’ as the two regions look to feed their downstream demand with critical minerals that bypass China. Likely, other key downstream economies will be looking to join the Alliance, including Japan, South Korea and the UK. This can also offer an opportunity for producer nations to access an alternative market much more easily, demanding higher prices for responsibly produced minerals and materials, provided that the OEMs are willing to pay high prices, or the Alliance subsidises the extra cost in comparison to Chinese critical minerals.
But what does the UK bring to the table? The IRA is backed by US$392.5bln in clean energy and climate spending. The EU has the €2bln European Raw Materials Fund alongside €100mln worth of commitments from individual nations, and significant funding is anticipated to be announced as part of the EU Raw Materials Act.
The UK has only recently announced £15mln for rare-earths magnet research and innovation, and the £1bln Ayrton fund that focuses on clean energy research and development – but there are no tax incentives or dedicated critical minerals funding to keep the existing industry in the UK, let alone attract foreign entities.
The UK desperately needs to join the Alliance if it has any chance of sourcing the critical minerals needed for its downstream and net-zero ambitions. Otherwise, the UK will find itself caught between two great powers.
Outlook into the near future
It is unclear how China will respond to the Western world’s desire to fly solo. Perhaps given the scale of the co-dependence, China will opt not to undermine Western projects but respond with a rapid transition away from its signature ‘by any means necessary’ practices. If any nation can clean up its act at scale, speed, and with the government mandate and capital behind it, it is China.
In 2020, President Xi Jinping made the pledge to net-zero by 2060 and the nation is already leading in renewable energy tech, accounting for 50-70% of wind, solar and EV production. Further adoption of less energy-intensive processes to extract and refine critical minerals in China would likely once again give the nation a competitive advantage over much higher labour and production costs in the Western world. Albeit switching to renewable technology is certainly achievable for China, solving decades of environmental degradation and polluting of waterways will be a true challenge.
China can however flex its muscle on the international stage, and if past headlines are anything to go by, a simple photo of a top minister at a refinery or strategic manufacturing plant can send shockwaves across the globe – sending a very clear reminder, of just how dependent the rest of the world is on China’s goodwill.
While the West is playing catch-up, China is playing the long game – from building ties with Afghanistan’s Taliban government (to access the nation’s estimated US$1trln mineral endowment), exploring in frontier jurisdictions such as Tibet and Greenland, to diving deep into seabed mining in the South China Sea.
Meanwhile, Western nations are signing memorandums of understanding between themselves citing greater cooperation, forgetting that mining takes time and will require greater collaboration with the global south.
In the coming decade, the power dynamics of the West-vs- East race for critical minerals will however shift drastically, with the deciding votes landing at the feet of the up-and-coming mineral-rich jurisdictions. Leaders of the Lithium Triangle, predicted to rival Australia’s crown spot as top global producer of the silvery white metal, are already hedging their bets between the great global powers, as are many African and Asian nations. The energy transition is not just a technological one, but one of shifting geopolitical power.