China/US: Tit for Tat Part 2
Recent words and deeds confirm Beijing’s readiness to retaliate against sanctions imposed by the US and its allies. However, its current dominance of the global strategic metals market is not as powerful a weapon as Washington wields through its control of state-of-the-art semiconductors.
“The Chinese government cannot simply sit idly by. We will not make provocations, but we will not flinch from provocations. So, China definitely will make our response.”
Ambassador Xie Feng, 19 July 2023
In Part 1 of this two-part article, I referenced extensively a 10 August note by Radio Free Mobile’s Dr Richard Windsor assessing the likely impact of President Joe Biden’s 9 August executive order aimed at restricting US investment in China’s technology sector. As he also wrote in that note:
“…the USA has a very large advantage as it has unilateral control over leading-edge semiconductor manufacturing (7nm and below) and significant control over advanced manufacturing (20nm – 10nm)”.
If China holds an equivalent advantage it it is surely through its dominance in rare earth elements (REE), a group of 15 heavy metals collectively referred to as lanthanides, plus yttrium and scandium.
As Govind Bhutada pointed out in a paper published by Visual Capitalist in January 2021:
“China’s dominance in rare earths is the result of years of evolving industrial policies since the 1980s, ranging from tax rebates to export restrictions”.
Beijing’s own actions to this end were amplified as far as the notoriously polluting refining of REE is concerned by the eagerness of the West to take advantage of China’s lower environmental standards. As a result, China today controls around 85 percent of global processing as well as close to 70 percent of global extraction. Furthermore, despite efforts to find alternatives dating back to the Trump Administration, the US still sources around 70 percent of its REE imports from China.
These numbers would be higher still were it not for Beijing’s attempt in 2010, when China controlled over 90 percent of the global REE supply chain, to pressure Japan over a territorial dispute by means of an embargo. Japan’s response was to build a supply chain not involving China, principally through a close partnership with Australia- and Malaysia-based Lynas Rare Earths which now produces about 12 percent of REE globally. In consequence, Japan currently imports only around 50 percent of its REE from China.
Despite its misfire with Japan, sanctioning REE and other strategic minerals where China dominates remains an obvious retaliatory option in the emerging ‘tit for tat’ with the US. Thus, it was no surprise when, on 2 August, Beijing announced new licensing requirements for the export of gallium and germanium — not REE but ‘minor metals’ which are key components in semiconductors, global production of which is, respectively, 80 percent- and 60 percent-controlled by China.
It is reasonable to assume that, in common with the quote above from China’s Ambassador to the US Xie Feng, this was a warning shot, especially as it came in the wake of both Japan and the Netherlands being cajoled by the US into imposing chip-related export embargoes. Indeed, the December 2021 decision to merge three of China’s ‘Big Six’ rare earth SOEs into a single China Rare Earth Group should be seen as preparatory for just this sort of action. Furthermore, as Edward White reported for the Financial Times on 1 August, China is well on track this year to exceed its 2018 overseas mining investment record of USD17bn as it looks to lock in its related dominance of the clean technology supply chain with the potential to give it more sanctions-related leverage.
All this being said, it is questionable how efficacious strategic mineral embargoes would be, at least in the medium term.
On the one hand although REE are relatively abundant, they generally occur in low concentrations and mixed with one another and/or radioactive minerals. As a 5 July article by Mai Nguyen for Reuters pointed out, their chemical properties make them difficult to separate from other materials, as well as producing significant amounts of toxic waste, making onshoring processing both complicated and expensive. Furthermore, China is home to an estimated 34 percent of known global reserves.
Nevertheless, Australia, Canada, the EU and the US have all set out policies and support packages to follow Japan in developing alternative supply chains. Although it remains to be seen how quickly these bear fruit, last year’s European response to the gas crisis gives reason to expect that, if China were to announce a sudden and sweeping embargo, we would see a rapid and effective response.
This could be helped by the fact that, as reflected in an 8 August article in the Financial Times by Leslie Hook et al as follows:
“The growing demand for these commodities is starting to shake up both the economics and the geopolitics of the energy world. The supply chains for some of these metals are becoming entangled in the rising tensions between the west and China.… Governments from Washington to Brussels to Tokyo are assessing where they can reliably source critical minerals without going through Beijing’s orbit. This shift is also transforming some smaller and historically under-developed countries into commodity superpowers. And their governments are now intent on rewriting the rules of mineral extraction. Many are trying to capture more of the value of their minerals, by doing more processing and value-added manufacturing domestically. Some are also attempting to control the supply, by nationalising mineral resources, introducing export controls, and even proposing cartels.”
As the final sentence of the quote makes clear, this is not an unqualified positive for the US and its allies. However, it is less good news for Beijing. As Rio Tinto’s CEO Jakob Stausholm put it:
“Every government will seek a deal with the mining industry that’s a fair one, that is a winner for the country and the winner for the industry”.
Citing as an example the opening up of Argentina to lithium mining, the Hook article also notes that higher prices “are making it efficient to develop deposits that were previously too expensive to access” including in countries which are well-disposed towards the US.
In addition to evolving patterns of extraction and processing, a second key emerging development lies in recycling as detailed in a major report commissioned by the Energy Transitions Commission and published last month. The report acknowledges that growth in demand for battery metals in particular will require large numbers of new mines; nevertheless, it argues that, at least by the end of the 2030s, the market response will be sufficiently well developed to ensure that recycling should “make a huge difference” (see, e.g., Glencore’s planned conversion of an existing plant in Sardinia).
Add to this developments in battery technology (on which I recommend, for those with access, a wide-ranging 23 August article in The Economist) and we shall likely be looking at a very different overall scenario even by the end of this decade as far as China’s dominance of the global strategic metals market is concerned.
This is in stark contrast to the scenario consequent to US tech-related sanctions which Dr Windsor and I offered in our February 2023 report, as follows:
“…China will end up focusing on the lagging edge where it can access the products and services that it will need to succeed. We suspect that the bulk of the effort will be placed on the 28nm to 45nm nodes where there is still plenty of demand. However, as…the leading edge moves into 3nm and beyond, these nodes will become increasingly dated and there is very little possibility of the Chinese being able to migrate past 22nm. This means that their semiconductors will become less and less competitive…. Even in the best-case scenario, this is likely to be increasingly a problem as Western systems will migrate to higher performance and smaller semiconductors which the Chinese will find very difficult to follow. This combined with strategies to slow China’s technology sector and the advancement of its economy and global power are exactly the goals being sought by the USA.…”
This first appeared on https://www.heteronomics.com and was reposted with permission.
Photo by Johannes Plenio
