China: Iron Ore, Lithium and Tungsten
I have written on China many times before, and for good reason.
The country is run by the Chinese Communist Party, and has been led by Xi Jinping since 2012.
Leaders who don't have to fear elections or short-term economic reputational damage can get stuff done that western leaders can only dream of.
You want to build a railway? Done in five minutes. You might have excessive pollution and zero worker safety, but you can just crack on with it. There's 28,000 miles of high-speed railway in the country, linking all major cities, and all of it built after 2008. In the UK, HS2 will run for 140 miles, and go wildly overbudget.
But the infrastructure building is just the surface level stuff. Over the past few decades, China has carefully been gaining control of virtually every critical mineral. In the west, major companies only invest in assets where it makes short-term economic sense; in China, the CCP ensures investment is directed at controlling global supply.
You can argue the toss over these numbers, but broadly China controls:
Rare Earth Elements? 60% of mining production, 85-90% of refining and processing capacity.
Graphite? 70% of natural graphite mining production, 90% of processing.
Magnesium? 85% of global production.
Tungsten? 80% of global production.
Antimony? 70% of global production.
Fluorspar? 60% of global production.
Cobalt? 65% of global refining capacity.
Vanadium? 50% of global production.
Bismuth? 80% of global production.
Tin? 45% of global production.
Lithium? 60% of refining capacity.
Tantalum? 50% of global processing capacity.
Zinc? 40% of global refining capacity.
Lead?40% of global refining capacity.
Nickel? 40% of global refining capacity.
Copper? 45% of global refining and smelting capacity.
Now consider for one moment that in 2021, the copper shortage gap — the difference between copper mined and copper demand — came to just 2% of production, enough to push up copper prices by 25%. 2035’s gap could be at least ten times as much already.
Now imagine China restricts export of any of these metals - oh wait.
They have.
First they came for germanium and gallium. Then they came for graphite. Then they came for antimony.
And they're coming for tungsten - I've been saying this for a long, long time, and now so are senior figures including Christopher Ecclestone, principal and mining strategist at Hallgarten & Company. My guess is an announcement in mid-October and a ban in mid-November. Good news for Guardian Metal et al, not so great for the rest of us.
For reference, tungsten is widely considered to be the last metal China can impose controls on that deals significant operational damage to the West without hurting itself.
And the best thing for China is that the West has almost no hope of catching up, unless it spends an extraordinary amount of money. And I'm not sure if you've noticed, but money is a bit of an issue at the moment.
Of course, it's all relative. When Wood Mackenzie cries into its cornflakes over the $85 billion cost associated with diversification away from China and its supply of critical minerals (calling it a near impossible task), you also have McKinsey arguing that getting to global net zero by 2050 will cost an extra $3.5 trillion a year. This makes the capital to get away from Chinese metals little more than pocket change by comparison.
The good news though is that across the western world, whether in the US, EU or Australia, serious moves are being made to invest in security of supply. The US Inflation Reduction Act, the EU Critical Raw Materials Act, Australia's Future Made In Australia program - all with grant funding galore to be snatched up.
But Chinese strategy is very clever; not only have they secured mineral rights to all the best assets across the globe; they have also developed dominance in refining and processing. This vertical integration strengthens China's influence on global supply chains, particularly for industries that are heavily reliant on these materials, such as electronics, renewable energy, and defense.
Take lithium.
In January 2023, China scrapped a huge EV subsidy that had been in place for a decade. Of course, the major players in the industry knew beforehand, so stocked up on lithium while the subsidy was in place — ironically paying more than if they had simply waited for the price reduction over 2023-24.
However, China and by extension Chinese companies, value supply over price. You now have a situation where these stockpiles are being used up instead of Chinese companies ordering lithium from suppliers. And because demand for EVs in China is temporarily lower due to the removal of subsidies, lithium suppliers are either having to sell at very low prices or stop production.
Indeed, CATL knew what was coming —offering discounts on batteries to Chinese EV manufacturers a month later, giving them a huge cost edge over competitors. This came with an in-built assumption that lithium carbonate prices would collapse, which no company would assume unless they had been given assurances.
Remember, there is no private finance in China — the entire country is controlled by the Communist party. While the state had no control over western interest rates, it carefully removed subsidies to make lithium production unviable — driving share prices and offtake possibilities lower.
Once Chinese companies have secured offtake agreements — see Ganfeng and Pilbara — or JVs/buyouts with every operator from Africa to South America on its terms, it will reintroduce the subsidies as rates come down, having bought assets/production rights at the rock bottom.
The western boom and bust mining supercycle is not set up to deal with this.
With Pilbara Minerals once again asset buying (Latin Resources), and rates starting to drop, my guess is that we are near the bottom of the cycle, though it may take until 2026 for a sharp recovery to take place.
Bear in mind that PLS' strategy is to buy assets in the lithium winter, and then profit in the boom. Consider that when the company bought Altura's assets out of receivership in 2020, most thought they were making a strategic error.
Those people ate their words a short time later.
Then there's iron ore, which is a completely different kettle of fish. In iron ore, China is in a toxic co-dependent relationship with Australia - Australia relies on sending its ore to China for income, and China relies on Australia's iron to keep the real estate bubble going (worth circa 40% of China's GDP). Australia is the world’s largest exporter of iron ore, contributing about $136 billion to its national revenue in 2023. It pretty much all goes to China.
But China's real estate goes pop? So does the CCP. Incidentally, Chinese citizens seem to be buying gold en masse when they previously thought real estate the best way to wealth. The collapse of major industry players will do that to you.
China can pretend for now that it won't back the real estate developers, but when push comes to shove, they have to. Because if they don't the entire house of cards will come crashing down.
Okay, Baowu might be saying that there will be no stimulus from the CCP, with Chairman Hu Vangming warning that the 'winter' of steel demand from China’s struggling construction industry would be 'longer, colder and more difficult than we expected.'
And yes, this has hit the iron ore price hard. But if the real estate sector implodes, it's game over for Xi.
Spending decades consolidating critical minerals to be toppled by iron ore has a certain irony though.
- Charles Archer, 21/8/2024