Last month, the US House Select Committee on China announced it was forming a bipartisan group, led by Congressman Rob Wittman, to counter China’s dominance, assiduously built over a couple of decades, across critical mineral supply chains. It’s a move that’s perhaps some years too late. In a statement to Reuters, the Committee said the group would “work to create transparency into U.S. supply-chain dependency for critical minerals and develop a package of investments, regulatory reforms, and tax incentives to reduce that dependency.”
Securing critical mineral supply chains, across all stages from ore procurement to processing, is now at the forefront of the economic security strategies of nation-states, especially those of the world’s biggest economies. Critical minerals are vital not just for the energy transition, but across semiconductors and consequent frontier technologies involving defense, artificial intelligence, blockchain, IoT, data centers, etc.
China today is central to manufacturing networks across these industrial sectors and its overwhelming preponderance is a source of considerable disquiet, a worry that the dominance could be weaponized. China dominates everything from the procurement, refining and the downstream use of these minerals. Last September, Goldman Sachs Research estimated that China accounted for 85 to 90 percent of global rare earths mine-to-metal refining, besides 92 percent of global manufacturing of rare earth magnets. China also refined around 68 percent of global cobalt, 65 percent of nickel, and 60 percent of lithium needed for EV batteries.
The effort to de-risk these supply chains will cause considerable geopolitical and geo-economic churn. There’s cause for both short-and-medium term tensions. In the short-run, as a deliberately provocative and belligerent China flexes its muscle in varying degrees across the South China Sea and the Taiwan Straits, there’s the threat of disruptions in the supply chains of critical minerals could potentially lead to serious global economic shocks.
The issue is not purely economic either. It’s about the exercise of geopolitical power. In the medium-term, as the US and the world strives, to end China’s ascendancy in the critical mineral sector, there’s questions about how China might use the structural power arising from the dominance especially over Taiwan and its issues across the South China Sea and East Asia, particularly if things were to go out of hand.
Across renewable energy alone, the International Energy Agency (IEA) estimated that the average amount of minerals in a new unit of power generation capacity has risen 50 percent. Projections by UN Trade and Development (UNCTAD), based on data from the International Energy Agency indicate a global rise in demand of over 1500 percent for lithium, besides similar increases for nickel, cobalt and copper.
Last month, Gracelin Baskaran, the director of the Project on Critical Minerals Security at the Center for Strategic and International Studies (CSIS), in her testimony to the US Senate Health, Education, Labor, and Pensions Committee pointed out that of the 50 minerals included in the US Geological Survey’s (USGS) Final List of Critical Minerals, the country imported about 50 percent of its critical minerals. The US was wholly reliant on the import of 12 critical minerals. “The United States is wholly reliant on China for 9 of them, she said.
Then consider the demand in one developing country alone – India, the world’s fastest growing economy which has significant tensions with China. A report published on June 7 by Rajesh Chadha and Ganesh Sivamani at the Centre for Social and Economic Progress (CSEP) estimated that a base case scenario would see India’s needs alone rise exponentially by 2030 for solar photo voltaics (PV)s, wind turbines and battery energy storage systems. India’s demand in 2025 will be 58 tons for lithium, 17 tons for cobalt, 52 tons for nickel and 609 tons for graphite, besides 98,500 tons for copper. However, by 2030 demand is projected to rise to 13,671 tons of lithium, 3,878 tons of cobalt, 13,671 tons of nickel, 1,42,892 tons of graphite, and 3,75,091 tons of copper.
The IEA estimates that, by 2030, nearly 50 percent of the market value from refining will be concentrated in China, which was also the top producer for 30 of the 50 critical minerals (including 14 lanthanides, which are listed under rare earths), according to the US Geological Survey, 2023. China also exercises considerably dominance over the supply chains of several critical mineral ores. Its acquisitions of mines across the Democratic Republic of Congo, Zimbabwe and Argentina, for instance, will enable around 705,000 tons of battery-grade processed lithium to come from mines controlled by China by 2025.
There’s a medium-term risk of supply shortfalls that could arise not just from China’s belligerent policies in the region but also from disruptions across the seas as the hazards from coercive actions spiral. Such gatekeeping power provides not just the ability to set agendas but also veto on geopolitical issues and global economic growth. The global economic consequences of any exercise of such power can in the short-and-medium term only enhance Beijing’s relational-power capabilities.
It’s also about Beijing’s consequent gatekeeping power, one that it might be able to or choose to exercise over agenda setting when it comes to crucial Asian regional flashpoints. It’s to be noted that not only are China’s neighbors Taiwan, Japan and South Korea crucial to semiconductors and frontier technologies, but they’re also vulnerable as their supply chains necessarily cross the flashpoints in the Indo-Pacific over which China is slowly trying to build its hegemonic power.
China’s recent aggressive moves in its neighborhood and the reactive moves by the US and its allies like Japan, enhancing their military postures and partner security strategies across the South China Sea and the Taiwan Straits indicate the risks.
China, as the core node of the global critical minerals network, has the ability to destabilize the global economic system, though it must be noted that one potential consequence could be a destabilizing of its own economy as well. But it’s a power that must be assessed, given recent events in the Indo-Pacific, the Middle East and Beijing’s bonhomie with Moscow. It could well be exercised if Beijing so weighs and chooses in the interests of its hegemonic aims in the Indo-Pacific, particularly over Taiwan, East Asia and the South China Sea.
China’s power over the critical minerals network gains even more significance as global trade shows signs of fragmentation into blocs– one US oriented bloc, the other oriented towards China and, perhaps, a third bloc of non-aligned countries. Pointing out some of potentially deleterious global economic effects, Gita Gopinath, the IMF First Deputy Managing Director, stated recently: “Recent IMF analysis shows that fragmentation of trade in minerals critical for the green transition—such as copper, nickel, cobalt, and lithium—would make the energy transition more costly. Because these minerals are geographically concentrated and not easily substituted, disrupting their trade could lead to sharp swings in their prices, suppressing investment in renewables and EV production.”
What gives cause for further concern is that the network centrality and its consequent power is not just the dominance across the upstream supply chains but also the preponderance across downstream sectors and products. China’s dominance extends into the value chain of several sectors like electric vehicles, wind turbines and defense. The country makes, for instance, 68 percent of global battery cathodes across each chemistry, and 73 percent of active anode materials. Anodes account for around 12 percent of battery costs. Goldman Sachs Research also estimated that about 65% of battery components, 71% battery cells, and 57% of global EVs were made in China. The extent of the market shares highlights the vulnerability of costs and prices across supply chains with China’s near monopsony control.
Beijing has indicated that it’s not averse to using this power as a hegemonic tool that offers both economic leverage and strategic control. Beijing, in recent weeks, has demonstrated that it’s clearly able and willing to exercise its monopsony power. China recently announced a ban on the export of rare earth extraction and separation technologies to add to earlier bans on the production of rare earth alloy materials. Restrictions on critical mineral exports have been exercised nine times between 2009 and 2020, and the supply chains of US contractors have been threatened.
Admittedly, some of China’s actions have been tit-for-tat moves, following restrictions imposed by the US and some of its Western allies across manufacturing and technology, particularly semiconductors and some other products like EVs.
It’s not the US alone that has recognized the vulnerability. Other global industrial powers have, as well. Policy interventions are being attempted. However, it’s a question of how much time the world has before a flashpoint is breached and a veto attempted by Beijing on the global economy, as a means to secure its ends in the Indo-Pacific.
The IEA Critical Minerals Policy Tracker indicates that well over 200 policies and regulations to ensure critical mineral supplies are being attempted, including the European Union’s Critical Raw Materials (CRM) Act, the US Inflation Reduction Act, Australia’s Critical Minerals Strategy, among others. The US-led Minerals Security Partnership (MSP), a friend-shoring strategy that has 14 countries and the European Union collaborating to pull together the investment and execute the strategies needed across critical minerals’ supply chains, is also indicative of the global effort.
Countries like Australia, currently the world’s largest producer of lithium ore, are also carefully examining Chinese investment into critical mineral mining. On June 2, Australia’s treasurer Jim Chalmers, gave Chinese funds 60 days to dispose of their stake in Northern Minerals, a rare earths developer in Western Australia. “The decision, based on advice from the Foreign Investment Review Board, is designed to protect our national interest and ensure compliance with our foreign investment framework.,” a spokesperson for Chalmers said. Other countries including Indonesia, Namibia and Zimbabwe have introduced policies banning the export of mineral ores. The US-oriented bloc has also started on a spree to acquire mining assets, particularly in Africa.
However, the key worry is the time that these policies will take to break China’s near control. The world, outside of China, is still to develop the capabilities necessary to process some critical minerals at scale. Further, the mining industry has long project lead times and IEA estimates indicate that it could take upwards of 12 years for exploration and feasibility studies, besides another 4-5 years for construction. The lead times give China’s network centrality considerable teeth if it chooses to exercise it. Breaking the monopsony power that it has with its dominance of downstream industries and products is another story altogether.
UNCTAD estimates that 100 new mining projects are underway worldwide but to meet 2030 net-zero emission targets alone around 80 new copper mines, 70 new lithium and nickel mines each, and 30 new cobalt mines will be needed. Investment estimates range from US$360 billion to US$450 billion. However, based on current investments, there’s a potential gap of US$180 billion to US$270 billion.
Moreover, acquisition might not be quite so easy, given the lead that China has taken across key countries in Africa. The US-led blocs initiatives will inevitably collide with China’s interests towards both maintaining its control and safeguarding its own industrial security, across the globe and especially across continents like Africa. Another worry could be Russian interference, backing its Chinese ally, across countries like Mali, which has an estimated 700,00 tons of lithium reserves. Moscow supports military juntas in Mali and other countries in Africa stay in power. China’s Ganfeng Lithium Group already has considerable investment in Mali.
A further hurdle in countries where China has already penetrated might be the nature of its contractual arrangements. The contracts that China enters into are known to be complex and opaque. AidData research indicates provisions ranging from broad borrower confidentiality undertakings, to restructuring initiatives and cross-default provisions that ensure Beijing considerable bargaining power across recipient countries.
The AidData research also indicated that Chinese lenders retained the right to cancel loans and demand repayments, even in circumstances arising from political and economic developments that were unconnected to the relationships. This gives China considerable ability to exercise say-so across countries like the Democratic Republic of Congo or other African states, if the US-oriented bloc were indeed to seek new rights across those countries.
However, geopolitics could complicate matters, and perhaps load the dice in favor of China if it does choose to exercise its network power in the critical minerals sector. Russia’s economic and military-oriented dependence upon China gives it some say-so over what the end of the Russian invasion of Ukraine will look like, though Moscow has historically been known to be fierce about its foreign policy independence.
Across the Indo-Pacific, countries like Vietnam, Indonesia, Malaysia, and even India, need to carefully balance their relationship with China, even while courting the US to manage their trade and economy, as do Latin America and Africa. In the Middle East and West Asia, China’s strong footholds in Pakistan and Iran, besides its trade links with Middle Eastern powers like Qatar, the UAE, and even Saudi Arabia, add to a set of problematic constraints for any US-centric bloc globally. Europe, today, is a continent under considerable internal pressure from both politics and economics.
Admittedly, China has not yet attempted to exercise any absolute hegemonic power. Beijing might not unless the ante is considerably upped over Taiwan and the South China Sea or East Asia. However, its behavior is bellicose and threatening across the Indo-Pacific. While Beijing will recognize that hard action, especially on critical minerals, could compromise its own economy, it might gamble that its sizeable domestic market offers it a cushion in the short-term. Yet, the risks in the Indo-Pacific and China’s neighborhood cannot be understated and the risks to critical mineral supply chains must be recognized. Much now depends upon how quickly others, especially the US and its allies move to neutralize the economic and strategic leverage that Beijing possesses in the critical mineral sector.
