INSIGHT: China accused of cornering strategic materials

02 February 2012 15:47  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--China is increasingly restricting foreign access to its strategic raw materials, and Beijing is moving to control critical resources elsewhere in a way that poses serious concerns for US industry and national defence, according to testimony before a special congressional panel.

In a hearing before the congressionally chartered US-China Economic and Security Review Commission (USCC), witnesses said that Beijing’s policies on strategic and critical materials soon could “present extreme supply challenges to the US and our allies”.

That testimony came as the World Trade Organisation (WTO) ruled this week that in violation of its WTO obligations, China has been placing illegal restrictions on exports of key industrial raw materials that are essential for chemicals manufacturing and other industries.

In addition, the US Department of Justice has filed charges against a US citizen who is alleged to have stolen DuPont Company’s long-held secret technology for titanium dioxide (TiO2) production on China’s behalf – and allegedly did so under the explicit direction of top Chinese government officials.

Members of the US Congress and the US intelligence community have labelled Beijing as the top industrial espionage threat.

In his testimony before the USCC, David Menzie, chief of global minerals analysis at the US Geological Survey (USGS), noted that for many of the more than 80 critical materials tracked by USGS, China ranks as the world’s leading producer.

“In a number of cases, China is not only the leading producer, but dominates world production, producing more than 80% of such minerals as antimony, magnesium metal, rare earths and tungsten,” Menzie said.

“In addition, China produces between 50% and 80% of bismuth, germanium, indium, pig iron, mercury, silicon, fused alumina, barite, cement, fluorspar, natural graphite, lime, magnesium compounds, wollastonite and natural zeolites,” he noted.

In order to assure its own access to supplies of critical materials, said Menzie, China has invested significant capital in its domestic production and, where domestic resources are lacking or diminishing, “has purchased or attempted to purchase foreign mineral companies”.

“China’s investments have been geographically broad across the globe and have concentrated on fuels and metals,” Menzie said, making inroads in raw materials resources in the South Pacific, Southeast Asia and elsewhere in Asia, and in Australia, Africa, South America, Mexico and Canada.

In these foreign acquisitions, Menzie said, Beijing, through its state-owned enterprises (SOEs), has chiefly sought majority controlling interests in projects and companies or has taken minority positions with options to purchase additional shares and/or future production.

“It would be reasonable to suggest that China’s consumption of these minerals is likely to continue increasing for some time to come,” Menzie said, noting that: “These minerals find their uses in a variety of manufactured products and in industrial chemicals”.

Jeffrey Green, president of J A Green & Company, a consulting firm on industrial and defence issues, noted that from the end of Second World War until the 1980s, the US was the leading global producer of rare earth elements (REEs), but “today, China dominates all aspects of the rare earth supply chain”.

“They produce roughly 94% of all rare earth oxides consumed worldwide, nearly 100% of commercial rare earth metal, and the vast majority of rare earth alloy and magnets,” he noted.

With that dominant control of the global REE market, Green told the commission, “China has embargoed neighbouring countries [Japan] over diplomatic disputes, frequently revises its export policies, implements strict controls on the industry nationwide, and increasingly controls export quotas for materials.

“These policies have resulted in a growing supply-chain dominance that has often led to relocation of industrial  players to China as they seek to secure rare earth supplies,” Green said, adding that: “Such relocation has led to growing concern over technology transfers and intellectual property.

“While the global market has responded by attempting to bring new sources of supply online,” he said, “to date we have seen no new production in the rare earth oxide market, and our dependence on Chinese sources has grown.”

That complete role-reversal in rare earth elements and materials began, said Green, when China realised the value of their abundant rare earth reserves and took steps to steadily increase production through the 1980s.

“Then, during the 1990s, China flooded the market by more than tripling the previous world supply of the materials,” even though Chinese rare earth mines were largely unprofitable and survived on Beijing’s subsidies.

China produced and exported those materials “at prices far below the actual costs of production”, Green said. “With the additional industrial advantages of a low labour cost, questionable environmental standards and export taxes, the impact of these efforts were swift and dramatic.”

“Within 20 years China went from producing roughly one-third to nearly all of the world’s supply of rare earths,” he said, causing REE mines in the US and elsewhere to go out of business. US firms that refined rare earth metals and alloys and manufactured rare earth magnets “moved overseas or simply closed”.

Green warned that Beijing’s aggressive policies in the rare earths segment are being applied to other strategic and critical raw materials.

Fluorspar, according to USGS, is the primary feedstock for manufacture of virtually all fluorine-bearing chemicals and also is a key ingredient in aluminium production.

China already accounts for 50% of global fluorspar production, and Green said that last year Beijing’s Ministry of Industry and Information Technology (MIIT) initiated a plan to deliberately decrease production of fluorite (the mineral form of fluorspar) year over year “for the protection of resources and the environment”. 

That citation to resource protection and environmental concerns is one of the few exceptions under WTO rules against restricting production.

Green also cited graphite as an at-risk critical commodity, noting that it has broad application in the steel industry, lithium-ion battery production, electric motors, and is used as an ablative material in missiles and bombs and is a lubricant for small arms ammunition and in the production of body armour.

Graphite also has the potential for much wider industrial use, he said, as the basis for graphene, a new material discovered in 2004 and said to be a likely replacement for silicon-based electronics and in other high-tech applications.

Green said that China produces about 73% of the global supply of graphite and holds nearly 80% of worldwide known reserves.

Citing China’s track record in the rare earths segment, Green said there is “an increasing tendency by the Chinese government to control production and exports to first gain a dominant position and then, once achieved, extract rents from the US and the rest of the global market”.

“Similarly, when considering those strategic and critical materials not predominantly concentrated in China, Chinese SOEs, sometimes with financial guarantees from the Chinese state, are working toward gaining a similar foothold in a variety of niche commodities” elsewhere in the world.

Green contends that if these trends continue, “basic availability of certain strategic and critical materials will be significantly reduced in the near future”.

“This does not necessarily mean that these strategic and critical materials will be completely unobtainable, but US companies would be fiercely competing against the rest of the world’s manufacturers for raw materials at artificially high prices,” he said.

“Those countries with direct, cheaper access would necessarily have a competitive advantage that does not bode well for US companies,” Green added.

He warned that in the absence of a comprehensive strategic approach on critical materials by US policymakers, “inactivity has become our plan, and domestic industries and the ability to manage our supply chain are fading”.

In earlier hearings and reports, the USCC has charged that China has broadly flouted its WTO obligations and has pursued commercial, military and diplomatic practices that "diverge significantly from Beijing's official policy of peaceful development".

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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