China and the new era of critical minerals diplomacy
Beijing’s export controls on rare earths and other niche metals are distorting markets and fuelling resource nationalism
Camilla Hodgson in London
© FT montage/Kyodo/Getty ImagesIn the late 18th century, a Finnish chemist named Johan Gadolin was sent an unusual black rock discovered in a quarry in Ytterby, near Stockholm.
The find was thought to contain tungsten, but Gadolin announced it in fact contained a “new earth”, a previously unknown mineral substance.
“Gadolin’s yttria” would become known as the first discovery of a rare earth compound, and among the elements it yielded was the silvery metal now known as “yttrium”.
Today, yttrium has huge strategic value in the production of the computer chips that are the backbone of AI.
It is also one of the niche metals at the centre of a raging geopolitical storm.
The vast majority of yttrium, along with many other minerals used in global manufacturing processes, is produced in China.
But as its tit-for-tat trade war with the US escalates, Beijing has increasingly restricted access to its supplies of critical metals.
These include gallium, used in radar systems, and germanium, used in thermal imaging.
Yttrium, however, is “the killer chokepoint”, says one supplier to the semiconductor industry.
“We are facing an existential risk . . . As of yet, there is no date where we will have any fully de-risked supply chain.”
The limited supply has caused “panic” in the past few months, says Nick Myers, chief executive of US rare earths start-up Phoenix Tailings.
Defence, automotive and semiconductor companies are calling “all the time”, with some warning that they may be forced to halt production by Christmas if they do not source the metal, he says.
Even before Beijing’s introduction of export controls, experts were warning that ageing mines and soaring demand for the metals key to electrification and AI might mean shortages.
Now, western countries are feeling the effects of losing a metals-processing industry they were happy to let move to China, a shock that has provoked market panic and a new resource nationalism.
In response, nations, led by the US, are racing to develop self-sufficient supply chains by locking in access to metals and building up domestic minerals industries, framing the issue as one of “sovereignty” and national security.
But that comes with its own risks if not done carefully, from further distortions in the small markets for niche metals to a minerals diplomacy that bisects the world into competing American and Chinese spheres.
For policymakers, doing nothing is no longer an option. Supply chains have “become politicised: they’re about security, they’re about resilience and they’re about diversification”, says Daniel Yergin, an energy historian and vice-chair of S&P Global.
Parallel efforts to build out new production will mean “markets will not be as efficient as they were before”, which is likely to lead to higher prices, he says.
But “the concept of efficiency is itself being refined”, since prioritising the lowest cost is useless if materials do not flow.
“We’re in the middle of a sea change in terms of how the global economy works.”
‘The west handed over the opportunity’
China’s control of metals supply chains is the result of three decades of investment and subsidies.
It has backed the production of everything from copper, used in cables and wiring, to the battery metal lithium, and a long tail of other metals including rare earths and tungsten, used in munitions.
Chinese authorities recognised that the country would need large quantities of metals for its burgeoning industries, and the country is today not only the leading producer but also consumer of many of them.
But Beijing also took advantage of deindustrialisation in many western countries, with manufacturing moving offshore in the pursuit of cheap labour and cleaner air at home.
“Thirty years ago, [the west] wanted China to do all the processing of these minerals.
We didn’t want it because it was too polluting.
The west handed over the opportunity,” says Tim Biggs, a professor at the Camborne School of Mines.
This outsourcing continued in spite of a warning shot in 2010, when Beijing restricted Japan’s access to rare earths during a diplomatic spat.
The crisis underscored “growing international concern about China’s dominance of the production of rare earths,” the FT reported at the time.
Competing against low-cost production was difficult for non-Chinese producers. “The fact that China doesn’t play on a level playing field makes it very difficult for western producers,” says Ross Bhappu, chief executive of US uranium and rare earths producer Energy Fuels.
The result is that cheaply produced Chinese metals are now embedded in the just-in-time supply chains that global industries rely on, but which buckle dramatically when interrupted — as the Covid-19 pandemic, Russia’s full-scale invasion of Ukraine and the closure of the Strait of Hormuz trade waterway have shown.
That has given China leverage, which it has increasingly been willing to use: since 2023, it has imposed a series of export restrictions on a wide range of niche metals.
Worst hit include the US, Korea and Japan, major buyers whose imports from China have plummeted since 2022.
“China could shut down the entire semiconductor industry if they wanted to turn off the valve,” says Lita Shon-Roy, a sector expert at analysis group TechInsights.
Despite the export controls, metals flows have not ground to a halt.
Instead, China has created a licensing scheme under which it decides who gets which minerals.
The lengthy application process gives authorities detailed information about which metals overseas companies and their contractors are using, and why.
Applicants must show that the material is going into civilian, rather than military, supply chains.
A researcher demonstrates the traits of the gallium-based liquid alloy. Beijing has increasingly restricted access to its supplies of critical metals, including gallium, which is used in radar systems © Feature China/Future Publishing/Getty ImagesCompanies, traders and analysts say material has been flowing but at unpredictable paces, with licence approval often slow.
“The export control system has evolved from a crisis into a managed system”, though buyers still face “compliance and commercial” challenges, says Kyle Sullivan, vice-president of business advisory services at the US-China Business Council.
This embeds new uncertainty into corporate supply chains and risks customers switching to Chinese component suppliers whose metals purchases are not being monitored and squeezed.
One executive at a large Japanese user of rare earths says China wants to keep companies in a “neither alive nor dead” state, by supplying them with the minimum needed to avoid a supply chain collapse — which would hit Chinese companies that still rely on materials and components from Japan.
This uncertainty has created what one veteran tungsten supply chain expert describes as “hysteria”.
Companies are looking to stockpile “everything they [can] get their hands on”, with prices spiralling and some processors of mined tungsten asking customers to source feedstock themselves, they say.
“It’s just madness . . . The whole west is in a battle.”
The problem is especially pronounced for the defence industry.
Oliver Friesen, chief executive of Guardian Metal Resources, says he is in touch with defence companies that can no longer source tungsten from China.
GMR is developing deposits in the US, but the country has no active mines.
“Availability is becoming an issue,” Friesen says. “If we’re going to see defence demand ramp up, where is that material going to come from? I don’t think they have an answer.”
For the semiconductor industry, the rising cost of metals is less problematic than constraints on availability, says Bernstein semiconductor analyst Stacy Rasgon.
Two semiconductor industry suppliers say they are drawing on their metals stockpiles.
Reserve stocks of gallium are “much lower than they have been historically”, says one.
Customers will “pay what it costs, but we have to have something to sell them”, says the other.
New money for niche metals
The risks caused by over-dependence on a single supplier have triggered a wave of investment in support of new sources of metals, and the emergence of resource nationalism.
“There has been a dramatic increase in the funding that is being devoted to this issue,” says Graham Lederer, a geologist who spent a decade at the US Geological Survey.
“That simply wasn’t there in 2011” after the de facto rare earth ban on Japan.
Washington has announced about $40bn in minerals funding since 2022, though much of it is conditional, and taken equity stakes in a range of domestic miners.
In the past 18 months, Brussels has chosen dozens of strategic projects to benefit from faster permitting rules and the EU and member states have committed about €6bn to minerals projects in recent months.
An employee works on tungsten filaments at a workshop in Jiangxi. One industry chief executive says he is in touch with defence companies that can no longer source the metal, which is used in munitions, from China © Deng Heping/VCG/ReutersNations from the US to Australia also want to stockpile metals domestically for their companies to use in times of crisis, setting up a new competition for resources.
Whether stockpiling is effective or pits nations against each other “depends on how countries work together”, says former Rio Tinto boss Jakob Stausholm, pointing to the co-ordinated development of oil stockpiles following the 1970s crisis, the use of which helped stabilise markets this year during the Iran war.
Meanwhile, some resource-rich countries including Guinea and the Democratic Republic of Congo are pushing to capture more of the value of their natural wealth by requiring the energy-intensive processing of mined materials to be done domestically.
In Africa, the US has lobbied hard for American companies to be the buyers of mines that are up for sale, to secure the materials for US supply chains.
Zambia’s foreign minister Mulambo Haimbe recently accused the US of predicating aid on other demands, including access to the country’s minerals — though Washington has strongly denied any link between the two.
“The risk is that governments and firms become locked in such networks, exposed to the whims of American imperial power,” wrote Cambridge university and Providence College researchers in June.
This reordering of the industry through nationalistic or uncoordinated policies could further distort markets, and even result in the world producing too much of certain niche metals.
Six non-Chinese companies, including US-based Alcoa and Greece’s Metlen Energy & Metals, have each outlined production plans that could collectively bring online more than 300 tonnes of gallium per year, a little under half of annual global demand.
“If everybody starts producing it, the price will collapse because the market will go into oversupply,” says Guido Janssen, chief executive of mining and smelting group Nyrstar, part of commodity trader Trafigura.
Another executive says a similar risk exists in yttrium.
Experts point out that without government support, announcements are unlikely to translate into new gallium production.
Even if supplies do come online, China could easily recommence unrestrained exports, flooding markets and crashing prices.
That, miners argue, is why they need sustained government support and guarantees from buyers.
“Everybody is waiting for public money to secure and support these investments,” says one industrial gallium buyer, adding that project developers wanted customers to commit to paying a minimum price over many years.
Without government backing, “none of these projects will succeed”, they say.
Alcoa chief executive William Oplinger says the company is pursuing an “aggressive schedule” of first gallium production this year and wants to be “first to market”.
The metal would go to the US, Japan and Australia, whose governments are supporting the project.
“We saw during Covid how fragile supply chains are,” adds Oplinger.
“I think people will understand the importance of having multiple suppliers” of niche metals.
A drop in prices thanks to oversupplied markets may not be existential for new producers of niche metals, which are often made alongside other things — gallium from zinc smelters, for example — and may be backstopped by governments on national security grounds.
Like with the 1970s oil shock, the minerals crisis should be addressed “on a multilateral basis”, says Yergin.
“There is obvious need for co-ordination among consuming countries not only to avoid duplication but in terms of marshalling resources, creating diversified supply chains, and getting projects actually across the finish line.”
Creating an industry
Developing new supply chains is not only about backing the right projects, but also about long-term support, such as affordable energy and coherent industrial policies, experts say.
New mines can take decades to develop, and part of China’s success has been its commitment to long-term, patient funding — a model that is markedly different from the way listed western companies invest and the time horizons over which they measure success.
“China has done what we should have done” in securing its metals supply chains, says Stausholm, the former Rio Tinto boss.
“A lot of the critical minerals are going to China in any case, because that’s where the production is.
And that means the key question is: will there be more at-scale manufacturing in the west?”
For that to happen, “companies need to have confidence that US government support for the sector isn’t a two- to three-year thing that will end with the Trump administration”, says the US-China Business Council’s president, Sean Stein.
Beijing, meanwhile, is seeking to extend its own reach.
Chinese companies are looking to buy or finance overseas mines, including rare earth projects in Africa and South America, forcing companies to take sides.
“We did get a firm all-cash bid from one of the biggest Chinese rare earths companies” for a project in Burundi, says George Bennett, chief executive of US government-backed Rainbow Rare Earths.
However, “because of our commitment to building out a western supply chain for rare earths . . . we obviously turned them down”.
One executive at a major miner says the industry’s job “isn’t to pick political sides” but to increase the amount of metal being produced.
But the politics now embedded in talks with policymakers is something “we haven’t had to deal with as an industry for a very long time”.
Global trade has long been at the mercy of clashes between superpowers.
Around the time Gadolin discovered yttria, Britain and France were locked in a conflict that spilled into seaborne commerce, with knock-on effects on trade centres on both sides of the Atlantic.
Breaking that pattern may require a different framework.
David Abraham, an affiliate professor at Boise State University, says current responses to the minerals question are overly focused on the idea that each country needs to be self-sufficient and decoupled from China.
“That’s not helpful when you’re trying to compete against one country that produces more than all the other countries combined.
It’s not a sport, you don’t have to beat China.
We have to be able to set up supply lines that can’t be stopped.”
Additional reporting by Harry Dempsey in Tokyo
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