Going Underground

While China dominates the production of important critical minerals globally, the U.S. and its allies have been working to create their own supply chains. Beijing’s new export controls, meanwhile, require Chinese companies to report to the government details of every export transaction involving rare-earth metals. The new rules come just four months after China altogether banned exports of the germanium and gallium needed for semiconductor chips and solar panels. Why all this tension around these minerals?

Nicholas Kumleben is the energy director at the consulting firm Greenmantle, where he leads research on energy, commodities, and climate change. According to Kumleben, both the U.S. and China see critical minerals as strategically important—and only becoming more so over time. Yet they’re also unusual among key economic sectors where the two countries are competing: Washington has greater power in industries like energy and semiconductor chips, but China dominates a lot of markets for the minerals that go into them. So China uses its leverage in these markets to retaliate against U.S. moves to damage the Chinese economy—as they did after the U.S. administration’s ban last fall on exports of the most advanced semiconductor chips to China.

Meanwhile, the United States is having some success building a critical-minerals supply chain outside China’s reach. But, as Kumleben sees it, it’s still very unclear whether the U.S. or any alliance of Western countries will be able to compete with China in global mineral markets—on account of all the advantages China has with its low labor costs and light regulation.

This control is partly a result of the fact that Beijing is pushing to create a strong supply chain in the extraction and processing of critical minerals within China by the year 2030; but it’s also a result of the fact that the markets for critical minerals altogether are relatively small. It’s a lot easier to corner a market worth $10 billion a year in total than it is to dominate global markets in the hundreds of billions for, say, copper or aluminum.

Now, however, we’re starting to see more geopolitical competition in the supply chains where China has the most control. It’s no accident that in July, China put export restrictions on the rare-earth elements gallium and germanium. Why? Because China dominates these markets; the markets are relatively small; and the elements are used in important areas of manufacturing—such as semiconductor chips and solar panels.

Bluhm: You mention the relatively huge global markets for commodities like copper or aluminum. How much control does China have over these bigger markets?

Kumleben: Let’s take cobalt and lithium, for example—China’s control over the markets for those minerals is somewhere in the middle of the range. It’s not a monopoly; there are major Western firms at every link in the supply chains—from mining to refining, trading, and end use.

But Beijing has been working to increase the role of Chinese companies and the Chinese state throughout these supply chains. Their control has gotten stronger in recent years. For instance, Chinese companies have taken a greater share of cobalt production in the Democratic Republic of Congo; they’ve signed lithium-extraction monopolies in Bolivia; and they’re buying more projects across Latin America.

Overall, China is increasingly controlling markets that are becoming increasingly important. That’s pushed policy makers in the U.S., Europe, and elsewhere to create medium- and long-term plans to build a more secure supply chain—meaning one that excludes China.

“Beijing is trying to increase and protect its access to these minerals. It has two reasons: One, it sees Washington moving to reduce or eliminate dependencies on China economically—to decouple from the Chinese economy—and increasing U.S.-China tensions generally. Two, China’s whole economic strategy for the next few years is built largely on industries that rely on critical minerals.”

“If supplies of critical minerals were disrupted, there’d be a lot of things that would be very difficult to produce. Cell phones are a good example. They use tiny amounts of many rare-earth elements, and their batteries rely on lithium. … Even basic infrastructure requires critical minerals. … The U.S. administration’s big plans to shore up American infrastructure would be very difficult to pull off without a secure supply chain for critical minerals.”

“Critical minerals are exceptional because they’re a field China dominates. In many other fields of U.S.-China economic competition, the U.S. has a lot more leverage—even its own dominance—as with semiconductors.

In the economic competition between the two countries, the U.S. has many ways to hurt China—but the critical-minerals industry is one of the few where China can really hurt the U.S., with relatively little downside.”