China Fires Warning Shot in Trade War Ahead of Key Summit with the US
The Ministry of Commerce of China has implemented a special export regime for rare earth metals and oxides in November, just on the eve of the China-US summit. A month prior to this meeting, Beijing imposed separate export restrictions on graphite and its derivatives. In July 2023, exports of gallium and germanium were also restricted. All these materials are extensively used in the production of batteries, renewable energy sources, electric vehicles, innovative electronic components, and weaponry. And this is just the beginning, as developed countries were overly trusting when they left China in charge of extracting and processing rare earth materials.
On November 15th, during the Asia-Pacific Economic Cooperation summit (November 11-17, San Francisco, USA), a meeting is scheduled between US President Joe Biden and Chinese leader Xi Jinping. Exactly a week before the appointed date for the leaders' meeting, the Ministry of Commerce of China introduced a special export regime for rare earth metals and oxides. No, it's not an outright restriction, but it's very close. It's akin to holding a charged pistol against an opponent's temple. Everyone understands what the next move might be.
Operation "Interception"
Why Does It Matter? China has successfully taken control of global supply chains for many vital minerals over the last two decades. This includes materials crucial for manufacturing lithium-ion batteries that power electric vehicles, energy storage systems, civilian and military drones, and other energy-intensive devices. Benchmark Mineral Intelligence estimates that by the end of 2022, China had already dominated 58% of the global production of lithium compounds, 69% of nickel sulfate, 69% of synthetic graphite, 75% of cobalt, 95% of manganese, and 100% of spherical graphite.
Goldman Sachs reached similar conclusions in 2023, asserting that China accounts for 85-90% of the global processing of rare earth elements. China's industry refines 68% of global cobalt, 65% of nickel, and 60% of lithium necessary for electric vehicle batteries. Seventy-five percent of all batteries are manufactured in China.
China also plays a crucial role in the supply of materials used in solar panels and wind turbines. It's nearly a monopoly in tungsten production, a crucial heat-resistant and super-hard metal. According to the US Geological Survey, China accounts for over 99% of global sales of gallium and its compounds, with the remaining 1% distributed among five countries — Japan, South Korea, Russia, and Ukraine. Regarding germanium, China's share in the global market reaches 60%.
Photo: China oversees almost every aspect of the supply and production chain for modern batteries used in electric cars and other innovative products. Source: Benchmark Mineral Intelligence
How Did China Achieve This Control?
Approximately 20 years ago, the Chinese government strategically pursued the goal of dominating the production of electronic devices, equipment, and microelectronics (chips) by ensuring access to critical metals at relatively low prices. China already had some reserves of rare earth ore, both domestically and in dependent countries like Mongolia and African nations.
The next step was to build enterprises for extracting these metals from ores and concentrates. China had everything necessary for this endeavor — relatively cheap electricity, lenient environmental regulations, a compliant workforce, and unlimited state support programs.
This allowed Chinese producers of critical metals to lower their prices. On one hand, this created more favorable conditions for Chinese producers of electric vehicles, electronics, and more. On the other hand, this multi-year drop in prices for rare metals led to the destruction of competitors in other countries. All of this could have happened exclusively with substantial support from relevant market players on the part of the Chinese government.
Photo: The Chinese corporation CMOC Group Limited conducts the extraction of molybdenum-tungsten ores worldwide but processes them in China. Source: cmoc.com
Geopolitics Echo in the Metal Arena
And It's Not Just Economics. For the past 15 years, geopolitics has been a driving force behind economic policies, particularly concerning rare-earth metals. Ultimately, Beijing has employed various forms of export embargoes on these metals to influence its adversaries in the capitals of leading world powers. This has resulted in heightened risks and disruptions in global markets, leading to a loss of reliability in the supply chains of critical metals.
The first notable scandal unfolded in 2010 when Beijing imposed an export embargo on rare-earth metals to Tokyo amid disputes with Japan. In 2020, China halted graphite exports to Sweden.
However, the situation took a hard turn after China's direct and indirect support for Moscow during the invasion of Ukraine by Russia. Coupled with a frenzied arms race, this escalated matters. In response to China's extensive use of American microchips and related technologies, the US implemented export controls on advanced computer and semiconductor products supplied to China in October 2022. In retaliation, Beijing announced its export controls on gallium and germanium products to the United States in the summer of 2023.
The US continued to introduce new restrictions to curb China's aggressive development of its military-industrial complex. Washington restricted the supply of high-powered chips used by Beijing in artificial intelligence systems. In response, in October 2023, China imposed restrictions on the supply of graphite and high-tech products derived from it.
Finally, on the eve of Chinese leader Xi Jinping's visit to the US, the Ministry of Commerce of China introduced a special export regime for rare-earth metals and oxides. While officially termed as 'special,' this regime bears a striking resemblance to the preparatory stage for a total supply restriction.
Photo: Percentage of China's contribution to global extraction and processing of nickel, cobalt, lithium, and rare-earth metals. Source: Goldman Sachs Research
Next Moves: Lithium, Tungsten, Cobalt, Neodymium, Praseodymium
The rare metal tungsten stands as a crucial raw material for the production of metalworking tools, super-hard materials, and components for weaponry. China commands 84% of the global tungsten sales and its compounds. The next four countries in the top five tungsten producers, including Vietnam, Russia, Mongolia, and Bolivia, collectively make up only 12%. Among them, only Bolivia and Vietnam have relatively open trade relations with developed countries, including the USA. The tungsten card has not yet been played by Beijing, but it could be in the future.
Metals such as lithium, cobalt, neodymium, and praseodymium might play wildcard roles in this geopolitical game. They are critically important, and China's share in global supplies of these materials is also super-controlling, as mentioned earlier.
Currently, events around lithium are particularly complex. Media has repeatedly highlighted that the Russian invasion of Ukraine aimed, among other things, to seize deposits of valuable rare-earth metals. According to the US Geological Survey, Ukraine holds approximately 10% of all globally identified lithium reserves. Of the four major deposits, one in the Donetsk region is in an occupied zone, one in the Zaporizhzhia region is in a frontline zone, and only two in the Kirovohrad region are in a relatively safe zone. Only one deposit, located in the Kirovohrad region, is currently preparing for extraction. Additionally, it's worth noting that Ukrainian lithium deposits also contain other rare-earth metals, such as tantalum and niobium.
Due to the war, Ukrainian deposits cannot fully enter the game in the coming years. China, on the other hand, holds over 60% of the world's production of pure lithium and continues to expand it.
So, in the hands of the Chinese leader in San Francisco, there will be at least five aces – the ability to threaten an embargo on the export of critically important metals. What can the developed world counter to this? They can start developing alternative domestic sources of critical metals, a process earnestly underway in the USA, Chile, Australia, Ukraine, and many others. However, this process is quite inertial, and China took at least 15 years to achieve its current positions. Developed countries can do it faster, but certainly not in 15 months. Moreover, they will have to reconcile having potentially hazardous industrial facilities on their territories or pay a significantly higher price for clean technologies than Chinese manufacturers.
Certainly, as an interim solution, Washington, Tokyo, London, and Brussels can bring to the table the prospect of comprehensive technological blocking on Chinese industrial and innovation ambitions. The Great Trade War is looming.