Geopolitical and economic attention regarding the US-Chinese trade war has tended to fixate on control of semiconductors, energy sources, and lately, electric vehicles. The control and supply of critical minerals essential to the manufacturing of these products, and many others, has remained overlooked by comparison. China, through early and aggressive investment, has gradually developed a near monopoly over a large contingent of these critical resources, posing a serious threat to governments that are reliant on their imports for economic prosperity.
In the last decade, governments increasingly concerned by the vulnerability of mineral supply chains have established critical mineral strategies with lists that designate resources that are crucial for their industrial base. An official US government definition, formulated in the US Energy Act of 2020, recognised non-fuel minerals that are indispensable to economic and national security, absence of which would disrupt and jeopardise key manufacturing sectors.
In 2022, this definition was used to classify 50 such minerals as critical, to be reviewed every three years. The common use of these resources in a wide array of modern technology, from everyday items such as smart phones, to clean energy solutions, solar panals and wind turbines, and even vital defence systems, is what forms their central importance to economic prosperity.
Since the onset of the Ukrainian war, dependence of some European nations on Russian energy has presented a thorn in the side of any collective response by Europe. This should visualise the importance of diverse supply lines in any resources that underpin an economy. Critical minerals are, by definition, a resource that underpin economic function.
Chinese Dominance
As governments pursue clean energy solutions, demand for the critical minerals necessary to produce such technology is expected to increase. Whereas the last 50 years of energy security competition has been dominated by oil and gas, the next 50 years is predicted to be dominated by critical minerals and supply chains.
China has emerged with a monopoly over the supply of many of these resources. According to a US subcommittee, China now enjoys a “strangle hold on global critical mineral supply chains” and has created a fragile dependence on Chinese benevolence to maintain steady supply lines. It also provides Beijing the opportunity to wield critical minerals as bargaining chips, garnering geopolitical influence – an accusation that the Chinese government already faces.
The US Geological Survey estimated that in 2022, China was the world’s leading producer of 30 out of the 50 designated minerals critical to US economic and national security. Beijing has slowly acquired this control through monopolies and monopsonies over vertical supply chains of different minerals. For example, the extraction and processing of rare earth elements (17 elements which are all designated as critical minerals) is heavily dominated by China.
As of now, 60 percent of world rare earths are produced and 90 percent processed by China, providing a near complete monopoly. In other cases, where there is greater competition of resource extraction, influence is exerted through a monopsony which allows them to manipulate the market. Despite holding less than seven percent of the world’s known lithium reserves, an essential component in battery production, China has strategically positioned itself as a dominant player in the global lithium trade.
Through investments and supply agreements, Chinese companies have secured vast quantities of raw lithium from nations that are rich in the resource, Australia, Chile, and Argentina. The overwhelming quantities that are supplied grants China an extensive purchasing power, enabling significant influence over the price and supply.
Further domination of the processing of lithium into battery-grade material allows control of both the upstream sourcing and downstream refinement of the resource. As nations increasingly seek the energy transitioning technologies that lithium is often critical for producing, Beijing can leverage their control to assist in their broader geopolitical agendas.
Whip Handed Diplomacy
China has increased their grip on supply chains and thus the dependence of other nations. Control over critical minerals has provided Beijing a whip hand with which to pressure governments in other political situations. Between 2009 and 2020, Chinese exports of critical minerals were restricted nine times, more so than any other supplier in the world.
More recently, gallium and germanium exports were restricted in August 2023. This was followed by high-grade graphite in December of the same year. The two former minerals are vital components for the production of semiconductor chips and military systems. Both their markets are dominated by China, who produce 80 percent of gallium and 60 percent of germanium. The regulation of these exports was cited as being for national security due to their dual use within military applications. It is more widely understood as having been retaliation to greater US, Japan, and EU prohibitions of semiconductor exports to China.
As the trade war between Washington and Beijing develops, the ability to withhold resources vital for US economic and national security presents a serious vulnerability that Beijing has proven it is willing to act upon. The commonly drawn case study is from a 2010 spat with Japan regarding the disputed Daioyu/Senkaku archipelago. On the 8th September, a Chinese trawler crew were arrested for allegedly ramming into two Japanese coast guard boats within close proximity to the islands. Although the crew was released a week later, China began restricting rare earth element exports, which specifically targeted Japan for two months.
Source: VOA / Wikimedia Commons
The export embargo of rare earths to Japan presented a surprising vulnerability, prompting an urgent strategy to diversify. At the time of the incident, 90 percent of Japanese rare earth imports were from China. A decade afterwards, this had been minimised to 58 percent.
Tokyo prioritised the development of new technology which either reduced consumption of rare earths or used alternative resources, investing in overseas mining operations, and stockpiling critical resources. A budget of JPY100 billion ($1.2 billion at the time) was prepared for this mineral strategy the month following the dispute, demonstrating the perceived urgency. Through this multi-pronged strategy, dependency on Chinese imports was reduced and future short term supply shocks were mitigated.
The Future
The 2010 dispute identified the threat of China weaponising critical resources. Beijing’s willingness to wield their monopoly to leverage concessions in other areas has motivated a number of governments to devise mineral strategies and to diversify their supply lines. The Japanese model demonstrates that, through urgent and coordinated efforts, diversification is possible.
Yet, after a decade, reliance remained at 60 percent of rare earth imports, underscoring the scale of the challenge faced. The last three US government administrations have developed critical mineral strategies, but 60 percent of US designated critical minerals remain dominated by China. It is also clear that Beijing will not concede their control without resistance. In December 2023, the US began ramping up their efforts to process critical minerals domestically.
Through time and practice, China has developed an absolute advantage over other states in the knowledge and technology needed to process these elements. To slow any attempt by the US to close this gap, China quickly incorporated an export ban on its extraction and processing technology. However, whilst other nations may be late to the game, there are still opportunities to reduce the Chinese monopoly.
Developing their own processing plants and importing from other nations will help to diversify away from China. Critical mineral rich African nations are already the centre of this growing market. The global revenues from the extraction of four critical minerals – cobalt, lithium, nickle, and copper – over the next 25 years is estimated to reach $16trillion, of which Sub-Saharan nations stand to reap over 10 per cent from this. This is testament to the large found and untapped reserves of critical minerals on the continent. There remains an opportunity due to the large reserves of resources outside of China’s borders to scale up critical mineral processing and reduce Beijing’s dominance.
Questions:
- How will emerging technologies influence the control of critical resources?
- What strategies will China take to maintain it’s monopoly over critical mineral supply chains? Especially in Donald Trump’s second term as President.
- Will international investment into a mineral rich Africa be structured to benefit both supply chains and African nations?
Further Reading:
- “Harnessing Sub-Saharan Africa’s Critical Mineral Wealth”, W. Chen, A. Laws, N. Valckx, IMF, 29/04/24
- “China’s Monopoly over Critical Minerals”, K. Wells, Georgetown Security Studies Reveiw, 1/06/23
- “Building Larger and More Diverse Supply Chains for Energy Minerals”, J. Majkut, J. Nakano, M.J. Krol-Sinclair, T. Hale, S. Coste, CSIS, 19/07/23
